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Collection: Paul A. Volcker Papers
Call Number: MC279

Box 23

Preferred Citation: Balance of Payments [Folder 2], 1971-1974; Paul A. Volcker Papers, Box 23;
Public Policy Papers, Department of Rare Books and Special Collections, Princeton University
Library
Find it online: http://findingaids.princeton.edu/collections/MC279/c410 and
https://fraser.sdouisfed.org/archival/5297

The digitization ofthis collection was made possible by the Federal Reserve Bank of
St. Louis.
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Page 1
10/15/71

Exchange Practices of Other Countries
After Wlthdrawal of U. S. Convertibility

Country
Industrial
G10
Germany
France
Italy

Float

Pegged
to $

Pegged to
L or Fr.fr.

Other and Remarks

XSplit rate - fixed for trade
floating for all other.
Intervening to prevent undue
appreciation.

Netherlands/
Be1gium/Lux.11

Continuing to nominally
maintain dual rate but both
floating

U.K.

Would peg at lower
margin.

Sweden

Would peg at lower
margin.

Japan
Canada
Other
Switzerland


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Intervene to maintain order.

No official float announced
but SNB out of market - various
controls applied on purchase of
Swiss franc.

Norway

Would peg at lower
intervention level.

Denmark

Would pea at lower
intervention level.

Austria

Requires exchange license for
capital transactions.

Other Developed
Finland

Widened margin but still within 1%.

Greece
Iceland
Ireland
Malta
Portugal
Spain
Turkey
Yugoslavia

Allows very gradual appreciation.
So far only 1.04% above par.

New Zealand
South Africa
Russia

Periodically sets rates against
floating currencies.

1/ Dutch and Belgians are intervening in each others currencies to keep
relationship within previous 1-1/2% spread.


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Page 2

Exchange Practices of Other Countries
After Withdrawal of U. S. Convertibility

Country
Latin America

Float

Pegged
to $

Pegged to 15
or Fr.fr.

Other and Remarks

Argentina

x

Dual rate.

Bahamas

x

Broke with h.

x

Exports deniminated in nonU. S. $.

x

Parallel market for certain
transactions where $ floats.

Barbados
Bolivia
Brazil
British Hond.

Chile

Columbia
Costa Rica
Dominican Rep.

Ecuador

El Salvador
Guatemala
Guyana
Haiti
Honduras
Jamaica

x

Moved to float after initial
peg to in, may peg on $.

Mexico
Netherlands Antilles
Nicaragua

x
x

Panama

x

x
Widened margin to 3%.

Paraguay
Peru
Trin. & Tobago
Urumiav
Venezuela

Pegged lower margin within 1%
parity remains in
terms.

Page 3

Exchange Practices of Other Countries
After Withdrawal of U. S. Convertibility

Country
Near East

Float

Pegged
to $

Pegged to
h or Fr.fr.

Other and Remarks

Cyprus

Iran
Iraq
Devalued 20%

Israel
Jordan
Kuwait

Lebanon had previously had
free market.

Lebanon

Saudi Arabia
Syria

Increased margin to 1% against
nondollar currqncies.
Margin ot 1-1/2-6

Yemen

North Africa
Algeria
Ethiopia
Libya
Morocco
Somalia
Sudan
Tunisia
UAR


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F.F.

But not dual market, floating
against $ on basis franc financial rate.
X Periodic changes in rate -semi-float equalling 3.6%
revaluation to date.

Page 4

Exchange Practices of Other Countries
After Withdrawal of U. S. Convertibility

Country
Asia

Float

Pegged
to $

Pegged to
L or Fr.fr.

Other and Remarks
X

Afghanistan
Burma
x

Ceylon

Prior multiple rate system,
partly free, based on dollar.
Ploatina $ in accordance $-In
fluctuations.
Also pegged to I, at old rate.

Cambodia
Fiji
Hongkong

H.K. has always had a free
market.

x

India

X

Intervenes in T.

Indonesia

x

Devalued 9-1/2%.

Korea
Laos
h

Malaysia

Increase margin to full 1%
against sterling.

Nepal
Pakistan

x

Shifted from

Philippines

13

Singapore
Taiwan
Thailand

Vietnam


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x

Increase margin to full 1%
against I.

Page 5
Exchange Practices of Other Countries
After Withdrawal of U. S. Convertibility

Country
Other Africa
Angola--

Float

Pegged
to $

Pegged to
b or Fr.fr.
Port.esudo

Other and Remarks
Ploatina Portuciese
dependency.

Botswana
Burundi
Cameroon

P.F.

Dual rates as in France.

Central African
Republic

F.F.

Dual rates as in France.

Chad

F.F.

Dual rates as in France.

Congo (B)
Congo (K)

x

Dahomey

F.F.

X Dual rate is similar to
French.
Floating other currencies
with dollar.
Dual rates as in Prance.

Equatorial Guinea
Gabon

X Dual rate similar to
French

Gambia
Ghana
Guinea
F.F.

Ivory Coast
Kenya

Dual rates as in Franca.

x

Shift from I, Peg.

x

Uses U. S. $ as National
Currency.

Lesotho
Liberia
Malagasy
Mali

X Dual rate similar to
French.

Malawi
Mauritania

F.F.

Dual rate as in France

Mauritius

F.F.

Floating Portugese
dependency.
Dual rates as in France.

F.F.

Dual rate as in France.

Port.escudo

Mozambique
Niger
Nigeria
Reunion
Rhodesia
Rwanda
Senegal
_Sir
,rra LPonr,
Swaziland

Tied to South African rand

x

Tanzania
Togo
Uganda
Upper Volta

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F.F.

Dual rates as in France.
Shift from ID peg.

x
F.F.

Dual rate as in France.

9310-106

OPTIONAL FORM NO. 10
MAY IND EDITION
GSA GEN. REG. NO. 27

DEC

UNITED STATES GOVERNMENT

Memorandum

The Department of the Treasury
Washington, D.C.

DATE:

December 13, 1971

TO

Under Secretary Volcker
(Through Assistant Secretary P

FROM

Wilson E. Schmidt

sukrEar:

Effects of Flexible Exchange Rates on International Trade

If the occasion should arise when we wish to challenge
the common assumption that a floating exchange rate has an
adverse effect on the volume of international trade, we
could cite an examination of the Canadian experience which
has recently been completed by Peter Clark of the Research
staff.
With the assistance of an an academic colleague,
Charles Haulk, Clark has examined the Canadian experience
during the 1950's. He is unable to find any evidence that
Canada's flexible exchange rate caused a reduction in either
exports or imports. Clark's study found that both the spot
and forward quotations for the Canadian dollar fluctuated
about twice as much during the period when the Canadian
dollar was free to float as when the spot rate was tied to
a fixed par value, but a series of tests failed to show
any significant impact on the level of trade.
Copies of the study are available from Mr. Clark's
office, Ext. 2967.

cc - Messrs. Bennett, Cates, Hennessy, Schaffner, Pelikan,
Dale, Willis, Nelson, S. Cross, Reynolds,
J. Newman


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Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan


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•
December 1. 1971

Dear Mr. Allen:
In response to your request to
John Petty, I enclose a background
paper on the exchange rate question.
If we can be of any further
assistance on this or any other
matter, please call.
Sincerely yours,
aiPed)WilsonE. !talk
Wilson E: Schmidt

The Honorable
Richard V. Allen
Deputy Assistant to the President
for International Economic Affairs
Room 126, Old Executive Office Building
Washington, D. C. 20503
Attachment: 11/24/71 WESchmidt memorandum
to Mr. Petty "Background on
Current Exchange Rate Questions"

cc:

Messrs. Volcker, Bennett, Willis, Cates,
Die, S. Cross, Webber, J. Smith

OASIA RES:WESchmidt:MGJ

12/1/71
1

November 24, 1971

BACKGROUND ON CURRENT EXCHANGE RATE QUESTIONS

A foreign exchange rate is tne price of one country's
currency in terms of the currency of another country--i.e., the
price at which one currency can be exchanged for another.
The international monetary system established at
Bretton Woods called upon national governments to establish
official prices for their currencies. These prices were
quoted in terms of gold and U. S. dollars and referred to as
S.r values. Countries adhering to the agreement promised that
whenever market demand pushed the price of their currencies 1
percent above the officially established par value their
central banks would supply the local currencies in any amount
needed to meet demand at that price. They also agreed that
if the demand for their currencies dropped and the price fell
1 percent belcq the official par value the central banks would
purchase whatever amount was needed to maintain the price at
that level.
It became the general practice of most central banks
to use the United States dollar as their "intervention currency."
That is, they sold local currency against dollars when intervening to supply their own currencies and to pay in dollars
when intervening to buy their own currencies. This practice
required that the central banks hold United States dollars as
working balances, and many countries wcre happy to use the
U. S. dollar as the principal form in which they held their
internatiS nal reserves. Some countries which acquired more
dollars through this intervention procedure than they wished
to hold sold those dollars to the U. S. Treasury for gold or
requested the United States to purchase them with other assets.
Each country made its own decision as to what its par
value would be in the initial postwar period. The Bretton
Woods Agreement contained provisions which were intended to
prevent countries from unfairly lowering the value of their
currencies, but this intention was not fulfilled.


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- 2 -

The foreign exchange rates determine the competitive
position of one country's industries in relation to the industries of other nations--in its own market and in other markets
throughout the world. If a rate is set too high, a country
will be unable to export enough goods and services or to
obtain enough capital to pay for the goods, services and
foreign assets which its residents wish to buy or aid it
wishes to provide. As a consequence, its exchange rate will
fall to the lower intervention point and its central bank
will be required to supply foreign exchange. Thus, the
country's international reserves will drop. If, on the other
hand, the rate is set at too low a level, the country will
sell more goods, services, and other assets than its residents are prepared to buy from abroad and the rate will rise
to the upper intervention point, causing the central bank to
supply local currency against foreign exchange, thus increasing the country's official reserves.
Over the years, countries have tended to follow
a practice of establishing or maintaining exchange rates at
a level which provided a strong competitive position for
their export industries and protection against foreign
pressure in their domestic markets. Their official reserves
tended to increase. Because these exchange rates were set
in terms of the United States dollar and their intervention
was in dollars, their central banks accumulated dollars.
For the United States this meant the balance of payments
deficit. It meant that the competitive position of American
industries in relation to industries abroad tended to
deteriorate.
Because the dollar was serving as the intervention
currency and countries evaluated the appropriateness of their
exchange rates in relation to the U. S. dollar, the United
States did not have the freedom to change its exchange rate
as other countries did. The United States did not maintain
its par value as did other central banks by buying and selling
foreign exchange when the price reached the agreed limits, but
implemented its commitment simply by agreeing to purchase gold
from or sell gold to other central banks at the declared parity
of $35 an ounce. We could not change our exchange rate unless
other countries were willing to change the price at which their
central banks bought and sold United States dollars in their
own markets.


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3

By August 15 it had become clear that the pattern
of exchange rates being maintained by foreign central banks
was one which would lead to continued and excessive acquisition of dollars by the central banks of other major industrial
countries. This pattern would leave American industry in a
poor competitive position with the prospect that imports would
increase more rapidly than exports and our trade balance would
continue to deteriorate. Even taking into account the prospective increase in income from American investment abroad, it
had become apparent that the underlying U. S. balance o f goods,
services, and private remittances could be expected to deteriorate by more than $1 billion a year. It appeared that, in a
situation of reasonably high employment in the United States
and in its major trading partners, the United States would
have found itself in deficit on goods, services, and private
remittances in 1972 by some $4 billion. With the total of
private investment in developing countries, government grants
and government loans adding up to an annual net outlay of
about $6 billion, and another $1 billion of net outflows in
unidentified transactions which have been a regular characteristic of our balance of payments position for the last ten
years, the prospects were for a balance of payments deficit
with the patteraof exchange rates prevailing early this year
of roughly $11 billion. This was clearly an intolerable situation. Foreign monetary authorities were not prepared to
increase their holdings of dollars by such magnitude and U. S.
reserve assets (gold, etc.) had been reduced to more than $12
billion by mid-August. Furthermore, the competitive position
in which American industry was placed by these exchange rates
has, not surprisingly, produced strong pressure for the application of widespread restrictions on imports into the United
States.
The basic objective of the Administration in suspending the conversion of dollars into gold and in imposing the
import surcharge was to improve the competitive position of
U. S. industry in world trade and restore a sustainable
equilibrium. There are three major means of achieving this
end:


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(a) reducing U. S. government expenditures abroad
by obtaining a more equitable sharing of the burden of
defense,

4

(b) facilitating U. S. exports by the removal
of widespread barriers to such trade imposed by
foreign governments, and
(c) changing prices of the currencies of
other major industrial countries in terms of the
dollar.
At the present time most foreign central banks are allowing
the prices of their currencies to rise more than 1 percent
above the official par values, although many of them are
still intervening to keep those prices from rising to the
level needed to balance market supply and demand. Thus,
they are still acquiring dollars and they are not allowing
our competitive position to improve to the extent they will
be needed to eliminate our deficit. A few foreign monetary
authorities, notably those of France, set up a dual market
which allows the price of francs in terms of dollars to
rise for capital transactions and services such as tourism,
but keeps the price within the official limits for transactions involving trade. Since this practice affects the
competitive position of France's other trading partners,
as well as the competitive position of U. S. dollars visa-vis francs, the French policy has become a critical factor
in determining the extent to which other industrial countries
feel able to adjust their exchange rates.

Attachment:

11/19/71 ltr to Mr. Petty from Richard V. Allen,
Deputy Assistant to the President for International Economic Affairs.


OASIA RES:WESchmidt:MGJ
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11/24/71

THE WHITE HOUSE
WASH IN GTO N
NOV

9 1971

November 18, 1971

C
Dear John:
In our discussions with Congress, we find that there is a lack of
understanding of the role of exchange rates in the balance of payments adjustment process.
It would be very helpful to us if you could provide a two or three
page background paper, stating as simply as possible, the role
of exchange rates, how a revaluation or devaluation affects our
imports and exports, and what we hope to gain in the monetary
negotiations. We realize, of course, that this is an imposition
on you, but having a fact sheet of this type would be a great help.
With best regards,
Si c rely,

Richard V. Allen
Deputy Assistant to the President
for International Economic Affairs

The Honorable
John R. Petty
Assistant Secretary for
International Affairs
Department of the Treasury
Washington, D. C. 20220


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\kik

•

Date

11/5/71

From the desk of Charls E. Walker

The Honorable Bill Safire
To:


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The White Hcuse

The attached responds to your memo of
November 4 (for briefing book).

Charls 4t. Walker

fl

The Under Secretary of the Treasury
Room 3326

U
.

6
;C)
.

HE WHITE HOUaE---

coim
.

WASHINGTON

November 4, 1971.

•--„MEMORANDUM FOR:
:

FROM:

Va•c p,..„

Charls Walker

pl s

BILL SAFIRE

t:i *i
't

• .

4,031
'

• :(
,raso Iv IL.I
.

,
...........,
.1
':.1 .

jpp a

:
C

C

Peg"Go

tt;•• *.

In Pat Buchanan's absence, I am handling the briefing book.
Could you send me your suggested answers to the attached by
6 p.m. Friday?

eh)

istIF

Also, any Q&LA you envision coming up in your area in the event
of a conference next week.


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S

•

.

/ago° 40040

O ..

INTERNATIONAL ECONOMY

More and more observers feel the surcharge is hurting
the attempt to develop a new monetary system and that it is also leading
to a revival of worldwide protectionism at a time when West European
and underd(veloped economies are in serious slumps. When will the
surcharge be ended?


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•
•?,
OFFICE OF THE SECRETARY OF THE TREASURY
WASH I NGTON

1 789

D.C. 20220

November 5, 1971

MEMORANDUM FOR UNDER SECRETARY WALKER

Paul hasn't returned from the Cabinet meeting.
Here is suggested answer for Bill Safire.

Jack F. Bennett

Attachment


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INTERNATIONAL ECONOMY
.9.1.

More and more observers feel the surcharge is hurting

the attempt to develop a new monetary system and that it is
also leading to a revival of worldwide protectionism at a
time when West European and underdeveloped economies are in
serious slumps.
A.

When will the surcharge be ended?

The surcharge was introduced as a temporary measure

to remain in effect only until other measures could be
undertaken by the nations of the world to create conditions
in which U. S. producers can participate on an equitable
basis in world trade and the U. S. payments balance can be
put on a sound footing.

The surcharge can be and will be

removed as soon as adequate measures have been undertaken
in the exchange rate, trade restrictions, and burden sharing
areas.
Our objective is to achieve the required adjustments
not by an increase in protectionist measures but by a
reduction in restrictive measures.

This objective does

require negotiations -" and these negotiations are under way
but no nation wants a trade war.


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- 2 -

We must create condi,Lons which permit an improved and
viable monetary order.

But these conditions cannot be

attained until adequate measures have been undertaken to
restore balance to international economic relationships.
(Background information:

Only two instances have come

to our attention of actions taken by other governments that
might be associated in any way with the surcharge.

The

Canadian Government has introduced an employment support
program to assist those Canadic.n firms with large trade ties
with the

S. which are faced with employee layoffs because

of the surcharge.

The DaLlsh Government has adopted

an

import surcharge, not as a measure of retaliation, but because
the country has a serious and persistent balance of payments
deficit.
There has been some easing of economic conditions abroad
this year, in most cases the result of deliberate policies
adopted earlier by governments in the fight against inflation.
However, taking into account the pick-up in economic activity
in North America, the output of the industrial world has been
growing faster this year than in 1970.


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With policies in

,
......0-

...'"
---"*.

-3-

almost all of the major countries aimed at expansion, the
outlook into the next year is for a further acdeleration of
growth.)


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(more)

_

Q.

Why doesn't the U. S. agree to a small increase in the

price of gold in order to facilitate a settlement which
would end the current uncertainty in international trade
and finance?
A

Such a step serves no economic purpose, and over a

period of time would probably increase the likelihood of
disruptive uncertainty.

Doubts whether a new price could

be long maintained on an unchanged basis in a world of
constantly changing economic circumstances would create a
pervasie new source of uncertainty in world Larkets0
In fact, a change in the price of gold today might tend to
create a presumption of further changes in the future.
Furthermore, such a change in the price of gold would
be a step backward in the progress of the international
monetary system.

We have been making progress in recent

years in gradually de-emphasizing reliance on gold as a
monetary reserve, and we don't want to reverse this course0
The fact that a few countries are making an issue of this
for prestige purposes only delays a settlement.


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OFFICE OF THE SECRETARY OF THE TREASURY
WASHINGTON, D.C. 20220

October 15, 1971

MEMORANDUM TO:
FROM:

UNDER SECRETARY VOLCKER

Jack F. Bennett

SUBJECT:

Some Suggestions for Improving Our Public Posture

In the effort to improve our public posture in current
negotiations, I suggest that you give consideration to making
the following points with some emphasis in the Paris discussions and also as soon thereafter as possible in a public
forum:
1. Under currently proposed legislation removal of the
10% surcharge and of the "buy American" feature of the investment credit will be made simultaneously.
2. The U. S. is not dependent on the action of foreign
governments to create jobs in the U.S.; we have the means of
creating ample total demand for U.S. production and employment;
but the U.S. and foreign governments are dependent upon each
other if we are to avoid interventions in the market which
destroy the opportunity to extract the maximum productivity
from the world's economy. In other words, we are not trying
to take away their jobs but we are asking action so that
economic welfare may be increased on both sides and so that
unfair treatment will not be imposed on particular segments
of our economy.
3. The $13 billion current payments balance turnaround
projected by the U.S. Government would be the result of measures
which take time to take effect so that in any event it is anticipated that the U.S. will continue to have a deficit for the
calendar year 1972.


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I

- 2

-

4. The $13 billion projection and the various estimates
of sets of required exchange rate adjustments are useful
pieces of economic background information, but in view of
the wide imprecision inherent in such forecasts, it is
desirable that new agreements among governments be reached
not in terms of these variables but rather in terms of
specific undertakings by governments:
a)

to refrain from intervention in exchange
markets to build up or maintain excessive
exchange reserves,

b)

to refrain from intervention in foreign
trade to restrict imports and subsidize
exports, and

c)

to refrain from intervention in capital
markets to prevent productive international investment of private capital.

In other words, agreements should be reached on the
desirable government actions even though it must be recognized
that the balance of payments and exchange rate results of these
actions cannot be predicted with fine precision.


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OCTOBER 7, 1971
11:15 AM
MESSAGE FOR MR. VOLCKER

Robert Hormatz, of the White House, called and said he
has two questions and answers for the President, which he
may or may not use in the near future, on which Mr. Hormatz
would like your comments by mid-afternoon today. He dictated
the questions and answers to me as follows:

(1)

QUESTION:

Europeans and the Japanese have been putting

increasing pressure on the United States to devalue the dollar.

Does the United States intend to take such an action?
attettif

1,14 LetiA. /tr
01ilia

ANSWER:

iaauggign of the price of gol

raises long-terrri

issues about the international monetary system, and has to be

considered against the background of where we want this system

to go in the long run.

Raising the gold question at this point --

444a 40444(40a Z;44LAA4.40010/4
;74;1
only complicatand delaySthe resolution of the most

pressing economic problems we face today.

Moreover, we clearly

wish to see the role of gold in the international monetary

system diminished.


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A change in the gold price would be

2
(4;:ot
counterproductive in the achievement of that enthad
4tAt-(2)

QUESTION:

WAY

ektatef 4 00,4

44 4,
adi

There has been an increasing concern in Europe

and Japan that the 10 percent import surcharge, which has been

described as "temporary," will remain in effect until the end

of 1972.

Do you still regard the surcharge as a temporary

measure?

What is necessary for its removal?

ANSWER:

As I indicated in my speech to the Congress on

September 9, we cannot remain a great nation if we build a

permanent wall of tariffs and quotas around the United States.

We cannot live behind a wall and let the rest of the world

pass us by.

The surcharge is a temporary action.

Let me emphasize what Secretary Connally said at the

IMF/World Bank Governors meeting:

If other governments will

make tangible progress toward dismantling specific barriers


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11446
"

-3

to trade over the coming weeks and will be prepared to allow

market realities freely to determine exchange rates for their

currencies for a transitional period, we would be prepared

to remove the surcharge.

Such efforts to reverse any tendency

to maintain and extend restrictive trade and exchange practices

would be evidence of a significant move in the direction we

believe is necessary for a more stable economic order.

The United States, for its part, will work with other

nations to seek agreement on measures which fruitfully achieve

and maintain the needed adjustments, and to lay the foundations

for a constructive consideration of the long-term problems

iteirpte,

of our trading and monetary arrangements.

tttI
AV/W

_

Z; ittaurAe (4,

ie4

k
e.
Mr. Hormatz's phone is 395-5026.

MA

g: cfifil

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6/7 - it14 0 44'

L-6- LI

\nit
-...•••111

September 21, 1971

Suggested Question and Answer for
President Nixon in Detroit
Thursday, September 23, 1971

Question:

Mr. President, no progress seems to have

been made in the London meeting last week toward international agreement on new exchange rates and related matters,
and we understand the other countries at that meeting did
not feel they got a clear and precise answer on the conditions
under which the United States would remove the import surcharge.

Could you tell us what the U. S. conditions for

removal are?
Answer:

I said on August 15 that the import surcharge

was a temporary measure, and I mean it.

I want to remove

the surcharge as quickly as I possibly can, in good coAscience,
consistent with my responsibilities for the international
economic position of the United States.

Secretary Connally

said in the London meeting that the idea the surcharge would
be taken off only after the 1972 elections -- in other words
that there is a "political schedule" for removal -- is not
true, and I want to say that I completely agree with what he
said.

An approach like that would be irresponsible inter-

nationally and would be bad politics at home.

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•••

-2
I will remove the import surcharge as soon as we have
been able to negotiate with our friends abroad adequate and
reliable measures to assure a strong U. S. balance of payments
position.
We are not wedded to any take-it-or-leave-it formula for
accomplishing the adjustment that our trading partners have
been urging on us for years.

What we are wedded to is the

idea the adjustment will be made by the best combination of
measures we can find, taking into account all interests.
The import surcharge itself we know is far from an ideal
solution to our problem -- it will not in itself accomplish
more than a fraction of the adjustment we need, and we
recognize that it will not distribute even that inadequate
adjustment properly among countries abroad.
Other countries have urged us not to insist on immediate
and abrupt adjustment, but to spread the painful readjustments
over a reasonable time.

We are open to discussion of ways to

do this -- so long as we can be fully confident that really
reliable commitments for the ultimate establishment of a
consistently strong and sustainable U. S. position have been
received.


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- 3 -

If it is not possible to reach agreement promptly on a
specific currency realignment which, along with other
measures, would be adequate to adjust our position and those
of other countries to where they should be, another approach
we would be willing to explore would be to permit the
exchange market itself to make the adjustments over a period
of time.

But of course they couldn't do that unless artificial

governmental restrictions and interventions were removed,
including not only our import surcharge but also other
restraints on exchange markets and the free flow of funds.
We would be willing to consider that if it seemed to offer
the best prospect for a constructive international resolution
of the problem which would involve dropping our surcharge on
imports.

But it would be essential that the markets were

left free.
I want to repeat two themes.

One is that our conditions

for removing the import surcharge are basically very simple

••• MM.

merely a fully reliable set of international commitments
which can be depended upon to set our international financial
position on the course of sustainable strength without artificial
controls.

The second is that there may be many possible ways

to do this, and we are ready to explore them all promptly
and with all good will.

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,


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August 2, 1971

Dear Mk. Chairman:
This is to affirm that the propos
al for
an increase from $1 billion to
$1,333 million
in the Federal Reserve swap lin
e with the
central bank of Switzerland has
been reviewed
by the Treasury DeDartment and
that the Department has concluded that approval
of this
proposal by the Federal Open Mar
ket Committee
would be in the national intere
st.
Sincerely yours,
(Signed) Paul A.
Volcker
Paul A. Volcker

The Honorable Arthur F. Burns
Chairman, Board of Governors
of the Federal Reserve System
Washington, D. C. 20551

Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: Interview transcript
Citations:

Number of Pages Removed: 5

The Today Show. "An Interview With Dr. Pierre-Paul Schweitzer." NBC Network, August 23,
1971.

Federal Reserve Bank of St. Louis


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INTERNATIONAL MONETARY F LiNLJ
August 23, 1971

TO

: Mr. Dale

FROM: L. F. T. Smith
The attached papers relate to items (a),
(b), (c), and (d) of paragraph 5 of the statement of the Managing Director handed to you at
the meeting in the Red Room on Thursday evening.
A meeting will be held in the Red Room at
10:00 am on Tuesday, August 24 to provide an
opportunity to discuss some of the points raised.
The circulation of the papers is being
restricted to the Directors who attended the
previous meeting.

•

Determination of Relative Rates of Exchange

(a)

The table which appears on page 2, showing required exchange rate changes
for a number of countries relative to the United States dollar, was arrived
at in the following way.

(The description that follows applies strictly to

countries other than Sweden and Switzerland, where the numbers appearing in
columns (1) to (5) were reached by a slightly different process described
on page 4, below.

These countries are, however, included in "Other OECD.")

• Column (1) provides an estimate of what the balance of payments in 1970
of each country on current account (defined as comprising goods, services
and private remittances only, exclusive of aid) would have been if that country,
and other countries as well, had been maintaining a normal level of aggregate
demand and economic activity.

The cyclical adjustments were taken from

OECD paper CPE/WP3(71)13, Table 2, and supplementary data supplied by the
OECD Secretariat.
Column (2) provides an approximate estimate of the changes that might
occur in the cyclically-adjusted current balance between 1970 and 1972, at
1970 prices and abstracting from the general growth of the world economy
over these years.

This "trend adjustment" is included to take account of

the consideration that the new exchange rates should suit the circumstances
of the near future rather than the recent past.

First, estimates were made

of the trend changes in trade balances and current invisibles, at 1970
prices, by a method of extrapolation.

Then a series of allowances were made

for special factors, such as the German revaluation of late 1969 (the effects
of which had only been very partially worked out in calendar 1970), the
eight-point liberalization program adopted by the Japanese authorities in
June 1971, the indications of a worsening of the trend of the U.S. current
account provided by the data available for the first half of 1971, the


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411

Exchange Rate Changes Required to Achieve Balance of Payments Targets
(In billions of U.S. dollars)
Current Account
Balance for
1970, Cyilfically
Adjusted-I

Trend
Adj9cmen t-

(1) + (2)

Current
Account
Target-/

Adjustment
Needed to
Reach
Target
(4) - (3)

Required Exchange
Rate Change
Relative to
4/
U.S. Dollar-(in per cent)

(1)

(2)

(3)

(4)

(5)

(6)

Belgium-Luxembourg
France
Germany
Italy
Nethethnds

0.7
0.0
3.8
1.1
-0.3

0.0
-0.2
0.8
0.0
0.2

0.7
-0.2
4.6
1.1
-0.1

0.2
0.3
1.8
0.8
0.2

-0.5
0.5
-2.8
-0.3
0.3

10.0
7.3
13.4
9.4
7.3

United Kingdom
Canada
Japan
United States
Other OECD.'
of which.
Sweden
Switzerland

1.0
1.1
3.3
-1.2
0.0

-0.2
0.2
1.0
-2.0
0.2

0.8
1.3
4.3
-3.2
0.2

0.9
-0.2
1.6
4.8
-0.9

0.1
-1.5
-2.7
8.0
-1.1

7.2
12.1
15.0
0.0
9.3

-0.05
0.25

-0.08
0.0

-0.03
-0.25

8.4
10.3

-0.2
0.05

0.15
0.2

1/ Goods, services, and private remittances. Based on OECD paper CPE/WP3(71)13, Table 2, and data supplied by
OECD Secretariat; 1970 current balance for U.S. lowered by $0.5 billion in accordance with latest, revised U.S.
estimates.
2/ Rough projection of change from 1970 to 1972 in column (1) figures in the absence of exchange rate changes.
Figures expressed in 1970 prices.
3/ Based partly on OECD estimates of "reasonably balanced position in 1970" (CPE/WP3(71)13, Table 3), and partly
on IMF staff estimates of "normal" net flows of capital and aid.
4/ Calculated on the basis of the IMF staff's multilateral exchange rate model. Changes measured from parities
prevailing before May 30, 1970.
5/ Not including Australia.


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3

probability of a worsening in the U.K. trend owing to the relatively rapid
increase in domestic costs in that country etc.

(No account, of course,

has been taken of the temporary U.S. import surcharge.)

Finally, a general

additionawas made to all the figures to make the trend adjustments sum to
zero and to eliminate the excess of negative over positive adjustment which
would otherwise have appeared for the group as a whole.

Failure to do this

would have entailed an assumption that the current balances of the industrial
countries were likely to deteriorate vis-a-vis the r-st of the world--which
seemed unlikely.
Column (3) contains the cyclically adjusted current account balances
for 1970 adjusted for trend in the manner described above.
Column (4) represents the desirable or equilibrium levels of the current
account surpluses or deficits of the various countries, at 1970 prices and
scale of the world economy, taking account of the possibility of financing
such imbalances by capital movements or aid in a situation of over-all
payments equilibrium.

The figures inserted in this column were arrived at

by averaging (a) OECD estimates of a "reasonably balanced position in 1970"
(CPE/WP3(71)13, Table 3), which in turn are derived from national targets
for current account balances in 1975, and (b) Fund staff estimates of "normal"
net flows of private capital and aid at the present time or near future.

Both

sets of estimates were adjusted so as to sum to $10 billion, the combined
current account surplus of OECD member countries (excluding Australia) in 1970.
This was done to avoid any assumption that a substantially increased flow of
aid or capital to other countries is likely in the immediate future (except
such as may occur in proportion to the growth of the world economy).

In cal-

culating the equilibrium balance on current account by method (b), it has been
assumed that countries would retain approximately the 1970 degree of restriction over capital flows.


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4

^

Column (5) is derived from the two preceding columns, and measures the
amount by which the current account balance of the various countries would
have to improve or decline from the levels contained in column (3) in order
to reach the equilibrium levels set forth in column (4).
Columns (1) to (5) for Sweden and Switzerland were calculated in the same
way as for other countries except that the cyclical adjustments implied in
column (1) and the target current account balances in column (4), not having
been.separately specified in the OECD estimates used (in part) for other
countries, were estimated entirely by the Fund staff.
The changes in current account balances listed in column (5) are, it is
assumed, to be brought about by exchange rate adjustments and the rate
adjustments required for this purpose are listed in column (6).

The changes in

current account balances in column (5) are measured in U.S. dollars and the
exchange rate adjustments in column (6) are measured for convenience in percentage changes in the

..ISlla

values of the currencies concerned.

The exchange rate changes required to effect the changes in current account
balances have been calculated wIth the aid of a multilateral model which takes
account of the repercussions of rate changes in each specified country or
area on the current balances of each other country or area.
concerned with

ble trade only.

This model is

No account has therefore been taken of any

effect which rate adjustment may have on invisible items in the current account
I.lance.
Several assumptions of the model are worthy of special mention:
(1)

In each country or area exchange rate adjustment is assumed to be

accompanied by appropriate "flanking" demand management policies, so that
IS'stic expenditure will be adjusted to changes in the current balance
resulting from rate changes in such a way as to keep output constant.


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5

(2)

Account is, however, taken of cost effects.

Domestic currency costs

in each country are assumed to be affected by changes in the import price of
materials; in addition all cost elements, such as wages, profit margins and
indirect taxes are assumed to change by 75 per cent of any change in the
prices of domestically purchased goods and services in the country in question.
(3)

There is a considerable degree of disaggregation in the model.

each of the four SITC classes of traded commodities1

Thus

is considered separately,

as is also the category of non-traded goods, and for each of the traded groups
there is a different elasticity of substitution, price elasticity of demand,
income elasticity, and set of cross elasticities of supply.

Input-output

tables are used in each country to determine the weights of the various cost
elements.
(4)

For each commodity group and market there is a uniform elasticity

of substitution as between the products of different suppliers.

This elas-

ticity of substitution differs from one commodity group to the other, but
within each commodity group it is the same for all markets.

Subject to this

uniformity the elasticities correspond, so far as possible, to the availabl
empirical evidence.

In particular, price elasticities of demand for imports

in each country are based on econometric estimates.

1/ Food and live animals, beverages and tobacco, (2) crude materials except
fuels, (3) fuels, and (4) manufactures and miscellaneous goods.


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•••

August 23, 1971
Confidential
(b)

The price of gold in terms of currencies
The calculations submitted under (a) yield a set of relative exchange

rates.

The figures shown in the last column of the Table under (a) will

determine the relative competitiveness of countries in international
transactions and the relative value of reserves held in various currencies.
In order to determine the value of other reserve assets--gold, SDRs and
reserve positions in the Fund--in terms of currencies, and thereby to permit
again effective operations of the Fund in its two accounts, it will be
necessary to restore to the system a link between gold and currencies.
This requires the acceptance of a price of gold in terms of one currency;
the price in terms of all other currencies will then follow from the relative
exchange rates.
(i)

Selection of gold price

The attached Table, in which the data submitted under (a) are rearranged in the order of exchange rate adjustment, indicates that there
are a substantial number of industrial countries whose currencies are close
to equilibrium with respect to their trading partners.

The percentage

adjustments for currencres of France, the Netherlands, the U.K., Sweden,
Italy and Belgium all lie within a range of less than 3 per cent width;
the same observation applies probably to a number of individual other
OECD countries, as well as to many countries in the sterling and French
franc areas.
The absolute exchange rate changes involved in any realignment could
proceed from the assumption that no major parity changes should be made by
these countries.

There is still some room for choice on the basis of this

general assumption.


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Probably the most convenient solution would be to

2

leave the parities of sterling and the French franc unchanged, with all
other countries making the parity adjustments as suggested in the last
This would involve a dollar/gold price of about 7 per cent in

column.

excess of $35.00, i.e., approximately $37.50.
(ii)

Method to achieve gold price

Assuming Chat there is agreement on a new set of exchange rates and
gold prices of currencies, there are two ways in which these can be put
into effect.
All countries, other than those in the center of the range, can

.1.

propose new parities in terms of gold; thereafter the Fund applies Article
IV, Section

8

to maintain the gold value of its assets in the General

Account and adjusts Rule 0-3(i) so as to reflect the new dollar/SDR relation.
2.
Fund.

Alternatively, the process can start with decisions taken by the

The Fund can determine the foreign exchange values in terms of gold

for all currencies under Article IV, Section 8 and make the necessary
corresponding modification of Rule 0-3.

These actions would reflect the

agreed relative exchange rates and would permit members to engage in all
normal operations and trpmsactions in both Accounts of theFurd on the basis
of market rates.

Changes of parity (or gold price) might need action under

the domestic laws of member countries.

The Fund's action under Article IV,

Section 8 would not constitute either a change of par value or gold price
for any currency and therefore the Fund can take its action under Article
IV, Section 8 without awaiting legislation by members under their laws.


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3

Country_

Required Exchange Rate!!
Change Relative to
f, or F.Fr.
U.S. Dollar
% (rounded)

United States

0.0

-7

France

7.3

0

Netherlands

7.3

0

United Kingdom

7.2

0

Sweden

8.4

+1

Italy

9.4

+2

Belgium

10.0

+2.5

Switzerland

10.3

+3

Canada

12.1

+4.5

Germany

.13.4

+5.5

Japan

15.0

+7

1/ Changes measured from parities prevailing before May 30, 1970.


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August 23, 1971
Confidential
Wider Margins

(c)

The choice of new parities would be facilitated by the acceptance of
wider margins under the provisions of Article IV, Section 4(a) after
Article XVI, Section 1 had been invoked.
The time limits of Article XVI would automatically bring with it a
reconsideration of the wider margins within 120 days and their termination
after a year, unless the Articles had in the meantime been amended.
.It is suggested that the margins allowed for any currency would be
- 2 1/2 per cent vis-a-vis the U.S. dollar.

For countries that pegged their

currencies on a currency other than the dollar, this would imply a permitted
margin of 2 1/2 per cent less the margin on the dollar practiced by its
reserve currency.

The suggested figure would be a maximum and no country

would, of course, need to practice a margin on its own reserve currency
in excess of what it considered suitable to its conditions.


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k

12,

Confidential
(d)

Removal of the U.S. import surcharge
The exchange rate Changes suggested under (a) are calculated to bring

about a pattern of current account balances that is assumed to reflect a
reconciliation of the balance of payments targets of the main industrial
countries.

If the U.S. import surcharge were maintained on top of the

currency adjustments, this would involve the equivalent of a further relative
depreciation of the U.S. dollar as regards imports, and would lead to an
additional improvement of the U.S. current account by a further number
of billions of dollars.

Alternatively, if the exchange rate adjustments

were to be made on the assumption that the surcharge would remain in effect,
the changes would have to be considerably smaller than shown under (a).
It is suggested that the United States remove the surcharge as soon
as a new pattern of exchange rates goes into effect.


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Exchange Rate Changes Required to Achieve Balance of Payments Targets
(In billions of SDRs)

Current Account Balance
for 1970, Cyclically Adjustedli

Trend
Adjust2
ment/_

(1) + (2)

Current
Account
3/
Target (1970)--

(1)

(2)

(3)

(4)

Belgium-Luxembourg
France
Germany
Italy
Netherlands

0.7
0.0
3.8
1.1
-0.3

0.0
-0.2
0.8
0.0
0.2

0.7
-0.2
4.6
1.1
-0.1

0.2
0.3
1.8
0.8
0.2

United Kingdom
Canada
Japan
United States
Other OECD

1.0
1.1
3.3
-1.2
0.0

-0.2
0.2
1.0
-2.0
0.2

0.8
1.3
4.3
-3.2
0.2

0.9
-0.2
1.6
4.8
-0.9

/o,s

600

1615-

lo-La

Adjustment
Needed to Reach
Target
(4) - (3)
(5)

-0.5
0.5
-2.8
-0.3
0.3

Required Exchange
Rate Change Relative
to U.S. DollarAi
(in per cent)
(6)

10.0
7.3
13.4
9.4
7.3

7.2
12.1
15.0
0.0
9.3

lotP0

dietct!70

1/ Goods, services, and private remittances. Based on OECD paper CPE/WP3(71)13, Table 2, and data supplied by OECD Secretariat; 1970 current
balance for U.S. lowered by $0.5 billion in accordance with latest, revised U.S. estimates.
2/ Rough projection of change from 1970 to 1972 in column (1) figures in the absence of exchange rate changes. Figures expressed in 1970 prices.
3/ Based partly on OECD estimates of "reasonably balanced position in 1970" (CPE/WP3(71)13, Table 3), and partly on IMF staff estimates of
"normal" net flows of capital and aid.
4/ Calculated on the basis of the IMF staff's multilateral exchange rate model.ahanges measured from parities ptevailing before May 30, 1970.


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Exchange Rate Changes Required to Achieve Balance of Payments Targets
(In billions of SDRs)

Current Account Balance
for 1970, Cyclically Adjustedll

Belgium-Luxembourg
,
France
Germany
Italy
. Netherlands

Trend
Adjust2
ment_./

(1) + (2)

Current
Account
3/
Target (1970)-

Adjustment
Needed to Reach
Target
(4) - (3)
(5)

Required Exchange
Rate Change Relative
to U.S. DollarA/
(in per cent)
(6)

(1)

.(2)

(3)

(4)

0.7
0.0
3.8
1.1
-0.3

0.0
-0.2
0.8
0.0
0.2

0.7
-0.2
4.6
1.1
-0.1

0.2
0.3
1.8
0.8
0.2

-0.5
0.5
-2.8
-0.3
0.3

10.0
7.3
13.4
9.4

1.0
1.1
3.3
-1.2
0.0

-0.2
0.2
1.0
-2.0
0.2

0.8
1.3
4.3
-3.2
0.2

0.9
-0.2
1.6
4.8
-0.9

0.1
-1.5
-2.7
8.0
-1.1

7.2
12.1
15.0
0.0
9.3

7.3

•
United Kingdom
Canada
Japan
United States
Other OECD

by OECD Secretariat, 1970 current
1/ 'Goods, services, and private remittances. Based on OECD paper CPE/WP3(71)13, Table 2, and data supplied
balailce for U.S. lowered by $0.5 billion in accordance with latest, revised U.S. estimates.
changes. Figures expressed in 1970 prices.
2/;Rough projection of change from 1970 to 1972 in column (1) figures in the absence of exchange rate
and partly on IMF staff estimates of
J./ ‘Based partly on OECD estimates of "reasonably balanced position in 1970" (cPE/WP3(71)13, Table 3),
"Iy)rttlal" net flows of capital and aid.
measured from parities prevailing before May 30, 1970.
4/% Calculated on the Imsis of the IMF staff's multilateral exchange rate mcidel.ehanges
.
17
'


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A

Exchange Rate Changes Required to Achieve Balance of Payments Targets
(In billions of SDRs)

Current Account Balance
for 1970, Cyclically Adjustedli

Trend
Adjust2/
ment_

(1) + (2)

(1)

(2)

(3)

Belgium-Luxembourg
, .
•
France
Germany
Italy
Netherlands

0.7
0.0
3.8
1.1
-0.3

0.0
-0.2
0.8
0.0
0.2

0.7
-0.2
4.6
1.1
-0.1

United Kingdom
Canada
J4an
United States
Other OECD

1.0
1.1
3.3
-1.2
0.0

-0.2
0.2
1.0
-2.0
0.2

0.8
1.3
4.3
-3.2
0.2

Current
Account
3/
Target (1974(4)

•

Adjustment
Needed to Reach
Target
(0 - (3)
(5)

Required Exchange
Rate Change Relative
to U.S. Dollar_111
(in per cent)
(6)

0.2
0.3
1.8
0.8
0.2

-0.5
0.5
-2.8
-0.3
0.3

10.0
7.3
13.4
9.4

0.9
-0.2
1.6
4.8
-0.9

0.1
-1.5
-2.7
8.0
-1.1

7.2
12.1
15.0
0.0
9.3

7.3

2, and data supplied by OECD Secretariat; 1970 current
1/ Goods, servicss'l and private remittances. Based on OECD paper CPE/WP3(71)13, Table
s.
balance for U.S. lowered by $0.5 billion in accordance with latest, revised U.S. estimate
exchange rate changes. Figures expressed in 1970 prices.
of
absence
.2/ Rough projection of change from 1970 to 1972 in column (1) figures in the
s of
(CPE/1P3(71)13, Table 3), and partly on IMF staff estimate
T/ Based partly on OECD estimatos of "reasonably balanced position in 1970"
"normal" net flows of capital and aid.
rate mode1.4hanges measured from parities prevailing before May 30, 1970.
4/ Calculated on the basis of the IMF staff's multilateral exchange


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Exchange Rate Changes Required to Achieve Balance of Payments Targets
(In billions of SDRs)

'

• ii

%
Current Account Balance
for 1970, Cyclically Adjusteall

Belgium-Luxembourg
,
•
France
Germany
Italy
Netherlands

Trend
Adjust2/
ment_

(1) + (2)

(1)

(2)

(3)

0.7
0.0
3.8
1.1
-0.3

0.0
-0.2
0.8
0.0
0.2

0.7
-0.2
4.6
1.1
-0.1

1.0
1.1
3.3
-1.2
0.0

-0.2
0.2
1.0
-2.0
0.2

0.8
1.3
4.3
-3.2
0.2

Current
Account
3/
Target (1970(4)

0.2
0.3.
1.8
0.8
0.2

Adjustment
Needed to Reach
Target
(4) - (3)
(5)

Required Exchange
Rate Change Relative
to U.S. Dollarg
(in per cent)
(6)

-0.5
0.5
-2.8
-0.3
0.3

10.0
7.3
13.4
9.4

0.1
-1.5
-2.7
8.0
-1.1

7.2
12.1
15.0
0.0
9.3

7.3

•
United Kingdom
Canada
Japan
United States
Other OECD

0.9
-0.2
1.6
4.8
-0.9

1970 current
1/ Goods, services, and private remittances. Based on OECD paper CPE/WP3(71)13, Table 2, and data supplied by OECD Secretariat;
balance for U.S. lowered by $0.5 billion in accordance with latest, revised U.S. estimates.
in 1970 prices.
2/ Rough projection of change from 1970 to 1972 in column (1) figures in the absence of exchange rate changes. Figures expressed
of
estimates
staff
IMF
3/ Based partly on OECD estimates of "reasonably balanced position in 1970" (CPE/WP3(71)13, Table 3), and partly on
"normal" net flows of capital and aid.
1970.
4/ Calculated on the basis of the IMF staff's multilateral exchange rate modeLehanges measured from parities vevailing before May 30,


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Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: Press releases
Citations:

Number of Pages Removed: 2

International Monetary Fund. "Press Release." August 20, 1971.
International Monetary Fund. "Statement by the Managing Director of the International
Monetary Fund, Mr. Pierre-Paul Schweitzer." August 20, 1971.

Federal Reserve Bank of St. Louis


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https://fraser.stlouisfed.org

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
Burns and Governor Daane
To Chairman

From

Date August 19, 1971
Subject: The Magnitude of the U.S.
Imbalance and the Changes
in Exchange Rates Required

Ralph C. Bryant, George B. Henry,
Helen B. Junz, and Samuel Pizer

This note summarizes, as of tonight, our best judgment on the
following three questions: (a) How large is the underlying disequilibrium
in the U.S. balance of payments? (b) At what balance-of-payments target
should -we be aiming? and (c) What realignment of exchange rates might
enable the United States to reach this target?

Size of Disequilibrium
We estimate the disequilibrium in 1971 to be between $7-8
billion on a high-employment basis.

For 1972, we believe the high-

employment deficit to be $1 billion higher, that is about $8-9 billion.
Our judgment of the size of the disequilibrium is based on
calculating what the U.S. payments balance might have been if the United
States and other industrial countries had been at high employment in
1971 and were to be at high employment in 1972.

The calculations are

based on 1970 rates of exchange and assume that capital controls remain
in place.

The Appropriate Target
In our judgment, the adjustment should be sufficiently large
to give us a high-employment official settlements balance somewhere
between a $ 1/2 billion deficit and a $1 billion surplus.

This would

imply an improvement in the official settlements balance of about


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$8-10 billion based on the 1972 estimated shortfall.
Although a small improvement could be expected for the capital
account after realignment of exchange rates, we judge that the lion's
share would need to take place in the current account.

Hence we judge

the needed improvement in the current account to amount to $7-9 billion,
of which about $6-8 billion would have to come in merchandise trade.
Removal of capital controls would require a somewhat greater adjustment,
but probably no more than $1-2 billion.
Treasury estimates tend to target on the 1973-75 period, but
this exaggerates the amount of change needed to remedy the present
imbalance.

An attempt to offset now the deterioration that might come

from divergent economic trends or policies in the period after 1972
might well abort the adjustment process.

The problem of adjusting

possible future payments imbalances would best be handled by greater
flexibility of exchange rates.

New Pattern of Exchange Rates
The accompanying table indicates a pattern of exchange-rate
changes that we believe would produce an improvement in the U.S. trade
balance in the required $6-8 billion range (a target of $7 billion is
used in the calculations).

When these changes are weighted by countries'

shares in world exports, the depreciation of the U.S. dollar vis-a-vis
the entire world would be roughly 4 3/47Q; weighted by U.S. import shares,
it would amount to 7 3/4%.

If the rate changes are weighted by

countries' shares in OECD exports to the world, the average appreciation
of the revaluing countries would amount to 97g.


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FR(Confidential)

August 19, 1971

Exchange-Rate Adjustments Needed to Achieve a
$7 billion Improvement in the U.S. Trade Balance

Percentage Revaluation /
Alreadyv
Total
Effected—
Japan
Germany
BLEU
Netherlands
France
Italy
Switzerland
Austria
United Kingdom
Canada
3/
Other OECD-

15
12/
1
2
71
/
2
6
6
6
9
7/
1
2
5
12/
1
2
5

5
1

7
5
5

To be
Effected

Estimated Effects
on U.S.
Trade Balance
( billion)

15
7/
1
2
71
/
2
5
6
6
2
2/
1
2
5
7/
1
2
5

1.50
1.25
.30
.25
.35
.30
.25
.05
.50
1.50
.25

Non-OECD
Total

Note:

.50
7.00

Total balance-of-payments improvement required is estimated to
be $8-10 billion. Of the $8-10 billion, $6-8 billion would need to
come in the trade balance. Devaluation benefits in the capital
and invisibles balances might yield an improvement on the order
of $1 billion.

1/ From mid-1970 parities.
2/ As of mid-July 1971.
3/ Australia included with non-OECD.


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4...
We estimate that the largest part of the impact of these
exchange-rate changes on the U.S. trade balance would occur some
time between 12-24 months after the changes were effected.

If fewer

countries revalued, the total effects would be more than proportionately
smaller.

A large amount of the improvement in the U.S. trade balance

occurs in third markets.
At the present time the current-account positions of the
countries listed in the table are such that the implied deteriorations
in their positions would not put intolerable strains on them.

(A

possible exception to this judgment might be made for the United Kingdom
and the Scandinavian countries.)

If the postulated exchange-rate

changes were of a much greater order of magnitude (e.g., over 20
per cent for Japan, over 10 per cent for France and the Benelux
countties, over 5 per cent for the U.K.), we strongly doubt that the
resulting deteriorations in other countries' positions would be
tolerable.

Impacts of the 10 Per Cent Import Surcharge
We will shortly have ready a detailed analysis of the
estimated effects of the surcharge on U.S. imports.

Our preliminary

judgment is that a full year's effect, based on the fourth quarter
1971 level of imports, would fall into a range of $ 3/4 to 1-1/2 billion.
The countries hardest hit by the surcharge will be Japan
and Canada, as the following table suggests:


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% of total exports affected
Japan

29.3

Canada

14.4

Italy

9.2

Germany

8.6

United Kingdom

8.4

While the import surcharge is a powerful factor in the
forthcoming negotiations, its force depends largely on the expectation
that it would in fact be removed.

It does not have great effect

by itself on the trade balance, as compared with a change in exchange
rates. An average depreciation of the dollar by any given percent would
yield an improvement in the trade balance alone several times greater
than an import surcharge of the same amount mainta.ided on a permanent
basis.


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Federal Reserve Bank of St. Louis

August 11, 1971

Dear Mr. Chairman:
This is to affirm that the proposal for
an increase from $600 million to $ 1 billion
in the Federal Reserve swaz line with the
central bank of Switzerland has been reviewed
by the Treasury Department and that the Department has concluded that aaproval of this proposal
by the Federal Open Market Committee would be in
the national interest.
Sincerely yours,

Paul A. Volcker

The Honorable Arthur F. Burns
Chairman, Board of Governors
of the Federal Reserve System
Washington, D. C. 20:61

AVG I 2 WI

OPTIONAL. FORM NO. 10
MAY 1952 EDITION
GSA FPMR (41 CFR) 101-11.5

UNITED STATES GOVERNMENT

Memorandum
TO

Under Secretary Volcker
(Through Messrs. Petty and Schmidt),

FROM

F. Lisle WidmT

SUBJECT:

The Trade Balance and the Domestic Economy

DATE:

August 10, 1971

You expressed skepticism about the frequently heard
assumption that the U.S. trade balance deteriorates in
periods of high domestic activity and improves in periods
of slack. Chart I attached traces and compares the trade
balance (plotted annually) with what we call the "GNP gap."
As you can see, the correlation is not very high.
Imports are, of course, heavily influenced by rates of
increase in the domestic GNP and by the GNP gap. Exports,
on the other hand, are primarily affected by rates of
growth in our major foreign markets which may or may not
be in phase with the U.S. cyclically. (Shortage in time
of strain on the domestic economy may tend to depress
exports so that in certain circumstances the export side
may also be influenced by the state of the domestic economy.)
Chart II plots the trade balance on a Quarterly basis
and compares it with rates of change in GNP.

Attachments


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5010-108
Federal Reserve Bank of St. Louis

Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan

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Federal Reserve Bank of St. Louis

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DUTY FOR BALANCE OF
jii,p0SES

By the President of the
United State of America

A PROCLAMATION

10EREAS, there has becn a prolonged decline in the international
monetary reserves of the United States, and our trade and international
competitive position is seriously threatened and, as a result, our
continued ability to assure our security could be impaired;
WHEREAS, the balance of payments position of the United States
requires the imposition of a surcharge on dutiable imports;
WHEREAS, pursuant to the authority vested in him by the Constitution
- Act of
:14;r4t-4 t-, thc m -,.'

P"r9

1930, as amended (hereinafter referred to as "the Tariff Act"), and
the Trade Expansion Act of 1962 (hereinafter referred to as "the TEA"),
the President entered into, and proclaimed tariff rates under, trade
agreements with foreign countries;

vlleEAs

under the Tariff Act, the TEA, and other provisions of

law, the President may, at any time, modify or terminate, in whole
or in part, any proclamation made under his authority;
NOW, THEREFORE, 1, RICHARD NIXON, President of the United States
of America, acting under the authority vested in me by the Constitution
and the statutes, including, but not limited to, the Tariff Act, and
• the TEA, respectively, do proclaim as follows:


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Federal Reserve Bank of St. Louis

lo#
- 2 -

A.

I

hereby declare a national emergency during which I call

upon the public and private sector to make the efforts necessary
to strengthen the international economic position of th.,?. United
States.
B. (1) 1 hereby terminate in part for such period as may be
necer

end --'ify prior Presidential Proclamations which carry

out trade agreements insofar as such proclamations are inconsistent
with, or proclaim duties different from, those made effective pursuant
to the terms of this Proclamation.
(2) Such proclamations are suspended only insofar as is required
to assess a surcharge in the form of a supplemental duty amounting
.1.()

CUll

v

Lid.urh suppie1adnai

uuLy shall be imposed

on all dutiable articles imported into the customs territory of the
United States from outside thereof, which are entered, or withdrawn
from warehouse, for consumption after 12:01 a.m., August 16, 1971,
provided, however, that if the imposition of an additional duty of
10 percent ad valorem would cause the total duty or charge payable
to exceed the total duty or charge payable at the rate prescribed in
column 2 of the Tariff Schedules of the United States, then the
column 2 rate shall apply.


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Federal Reserve Bank of St. Louis

C.

To implement section B of this Proclamation, the following

new subpart shall be inserted after subpart B of part 2 of the
Appendix to the Tariff Schedules of the United States;
ModifIcations tor Balance oi Payments Purposes
Subp -rt
Subpart C ileaduotes;


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Federal Reserve Bank of St. Louis

1.

This subpart contains modifications of the

provisions of the tariff schedules proclaimed by the
President in Proclamation
2.

•

Additional duties imposed.--The duties provided

for in this subpart are cumulative duties which apply in
addition to the duties otherwise imposed on the articles
involved.

The provisions for these duties are effective

with respect to articles entered on and after 12:01 a.m.,
August 16, 1971, and shall continue in effect until
modified or terminated by the President or by the Secretary
of the Treasury (hereinafter referred to as the Secretary)
in accordance with headnote 4 of this subpart.

3. Limitation on additional duties.--The additional
10 percent rate of duty specified in rate of duty column
numbered 1 of item 948.00 shall in no event exceed that
rate which, when added to the column numbered 1 rate imposed
on the imported article under the appropriate item in
schedules 1 through 7 of these schedules, would result in
an aggregated rate in excess of the rate provided for such
article in rate of duty column numbered 2.


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Federal Reserve Bank of St. Louis

4.

For the purposes of this subpart-(a)

Delegation of authority to Secretary.--The

Secretary ciay from time to time take action to reduce,
eliminate or reimpose the rate of additional duty herein
or to establish exemption therefrom, either generally or
with respect to an artdcle which he may specify either
generally or as the product of a particular country,
• if he determines that su,.qa action is consistent with
safeguarding the balance of payments position of the
United States.
(b) Publication of Secretaryls actions.--All
actions taken by the Secretary hereunder shall be in the
form of modifications of this subpart published in the
Federal Register.

Any action reimposing the additional

duties on an article exempted therefrom by the Secretary
shall be effective only with respect to articles entered
on and after the date of publication of the action in the
Federal Register.
(c) Authority to prescribe rules and regulations
The Secretary is authorized to prescribe such rules and
regulations as he determines to be necessary or appropriate
to carry out the provisions of this subpart.

-55. Arlc]c,

fro-2 ,11:2

accordance with determinations made by the Secretary in
accordance with headnote

4(a), the following described

articles are exempt from the provisions of this subpart:

Rates of Duty
Item

Article
1

9.48.00

2

Articles, except as exempted under
headnote 5 of this subpart,
which are not free of duty under
these schedules and which are
the subject of tariff concessions
granted by the United States in

+-1,

7r,r+,

10; ad val . .
(see headnote
3 of this
subpart)

N,) L.:1,,,lic,

•
•

.

This Proclamation shall be effective 12:01 a.m., August 16,

1971.
IN WITNESS WEEREOF, I have hereunto set my hand this fifteenth day
of August in the year of our Lord nineteen hundred and seventy-one,
and of .the Independence of the United States of America the one hundred
and ninety-sixth.


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Federal Reserve Bank of St. Louis

,

Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: Working paper
Citations:

Number of Pages Removed: 15

Keran, M. "A Method of Computing Trade Balance Effects on Exchange Rate Changes."

Federal Reserve Bank of St. Louis


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Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

TREASURY DEPARTMENT
OFFICE OF THE ASSISTANT SECRETARY
FOR INTERNATIONAL AFFAIRS
Date..A...1971
Under Secretary Volcker
To:
Thru: Assistant Secretary Petty
From:
Wilson E. Schmidt

Attached are the assumptions
made for the balance of payments
projections which you received
last night.


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Federal Reserve Bank of St. Louis

2

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Federal Reserve Bank of St. Louis

-=:•100

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142.'2;

5.20

•

EFFECTS OF EXCHANGE RATE REALIGNMENT
ON EMPLOYMENT IN THE U.S.

There is no doubt that the exchange rate realignment
should materially assist in the effort to reestablish full
employment in the United States.

We estimate that every

$1 billion improvement in the trade balance should bring
us about 60,000 jobs.
Unfortunately there is no way to predict the amount
4
of improvement in our trade balance which will occur as a
result of the realignment.

Estimates have differed widely

and the Treasury does not feel that any of these estimates
merits its endorsement.

If the ultimate improvement --

after a period of 2 years or more -- in the U.S. trade
..

' 47442-

1.
020-1211)

111
"
4/4
,,AkemAt 0

re n the range of $401mo $8 billion, as some of
balance were
7,)
rif7Sift:4
these estimates suggest, the number of jobs created would

A

1A/1

pmabebly be in the range of 350744e-to 500,000.
A
This estimate takes into account not only the added
employment in the production of goods directly for export
and for use in lieu of imports but also the indirect employment in producing goods which ultimately become a part of
those goods produced for export or in substitution for
imports.
The estimate also takes into account the multiplier
effect of the improvement in the trade balance on other


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Federal Reserve Bank of St. Louis

2
domestic income.

For every $1 billion improvement in the

trade balance we can expect an eventual increase in the
GNP of about $3 billion.

Thus a $6 to $8 billion improve-

ment in the trade balance would ultimately mean in increase
of roughly $18 to $24 billion in GNP and it is an increase
of this magnitude that leads to the estimate of 350,000
to 500,000 new jobs.
It must be borne in mind that the improvement in the
trade balance will be occurring in a period in which the
economy is recovering from a cyclical trough and in which
average labor productivity is rising.

In these circum-

stances one can not expect quite as many new jobs to be
:
j,
pv./ 5.1
L.. OW iIN, t''v 4 Pot
created as would be the case in a stagnant economy with
productivity static or declining.

In essence, however,

it is proper to expect that an improvement in the trade
balance will enable the U.S. to restore full employment
in a shorter period of time and with less resort to
expansionary fiscal and monetary policies than would
otherwise be necessary.
The added employment resulting from the exchange
rate realignment is likely to be very widely dispersed
throughout the economy. -There-are reasons to expect that

Ihe bulk of the improvement in the trade balance will be
in manufacturing.


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Federal Reserve Bank of St. Louis

Trade in agricultural products and raw

- 3

materials is generally assumed to be less affected by
the changes in relative prices than trade in manufacturing products.

It is logical to expect, therefore,

that by far the greater part of the job gains will be
in manufacturing and in the service industries associated
with manufacturing.

However, we have no way or predicting

which specific industries will be the principal beneficiaries, either in terms of additional exports or in
terms of reduced imports.

Thus it is not possible to

identify the industries in which the direct employment
gains will be concentrated.
U.S. exports are very broadly based and no single
manufacturing industry accounts for as much as 4 percent
of total export employment.

The export industries with

the largest employment shares appear to be primary iron
and steel products (3.3%) and the aircraft industry (2.6%).
U.S. imports of manufacturing products are also very highly
diversified with heavy emphasis on consumer goods, machinery
and transport.

Moreover, the greatest gains in jobs

arise indirectly as a result of the multiplier effect of
the increase in income and thus can be expected to be
broadly shared throughout the economy.


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Federal Reserve Bank of St. Louis

DRAFT
8/1/72
W.B.Dale

Dear Mr. Minister:
G.)7-r4v
Thank you for your mes-sage of July 31 concerning the
work of the Executive Board of the Fund on their report congt rkf
cerning international monetary reform. 7111
toe,
25,W
Your message has,-I take it, been-inspired by the fact
)/o
y 4ci i.-'C./L.)'
that the U.S. Executive Director has recently put forward in

me,

the Fund certain views of the U.S. Government concerning the
questions which are at issue in the projected international
economic and monetary reform,

Among other things, you have

referred to the views advanced by the U.S. Executive Director
tif

j

(2,m

as "belated" ("tardines") and as jeoparaizing the equilibrium
-/
-r4
which had until these views were advanced been presented in

ikon
the proposed report.

1,1

You have also stated that the draft

report, even if imperfect, does not rule out any reforms
44y,
susceptible of being applied to the international monetary
am
( vca-,
6c
system.j0 74J e f(00-7 j
/ki.-//
7
416
c,e/94aL 71e4Cf/XIC afiekA.071;r1, tIll
Ae Ar147
In responding to your message, I would first like to call
your attention to the background of this matter.

From the very

first suggestions for a report on this subject to be completed
by the Executive Board prior to this year's Governors' meeting,


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Federal Reserve Bank of St. Louis

(
,Peit'Ve.

7lie-akt
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•977eiw7/u fre'
the United States Director expressed doubt about_whether it 4/eplid-c..
• ;4,240

would be possible or helpful to have such a report as was
e 4/- iiettApri)./ 1,-7
)
vv4.)
•/-0re**,
being envisaged in the present year. These views were again
gox
-4404004,
stated,,MAy 22,-9-72 at which time the U.S. Director added that
mro‘71ire)iy4 com7v40,44,
eldekeil f,okt .oco/k •;.;fr •
rtfc
"only a report providing a genuinely neutral description of fr on,i-c. ri tioe
"Pokkm.ri

various policy options would have any chance of being adopted."
When the original staff drafts of chapters for the report were
ec_.440.e.of
40e
issued in the first part of June, The approach which they re-

7Ltiitcc401/C1

ta4-e?

flected confirmed our concerns that an effort would be made
to narrow the subject of the report and to focus it prematurely
on too confined a range of technical possibilities without
adequate discussion and appraisal of the fundamental problems.
With this in mind, the U.S. Director on June 19 distributed a
written statement expressing our views on the report, which
^LiTia

evri C.." •

is attached for your information.
4br /*(,1-?..ect
t. fre 749,-40.5
4
/
11
The views put forward by thE—U:S. Director in written form "r fe key.
'••
• 1. '7'
e
e pe7
Z*.
and repeated orally in the course of the discussion of the first .
draft by the Executive Board were in our view completely inadequately reflected in the revised draft of the staff distributed
in the first part of July.

Accordingly, as the U.S. Director

had indicated during the June discussions he would do if


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Federal Reserve Bank of St. Louis

eh,/

,
00ire
,41

6,7

pf-/Aiii )4,

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-3-

necessary, he has now distributed written material reflecting
U.S. views and attempting at least to some extent to open a
reasonable range of policy options and to obtain some discussion_Qf what we consider to be the real issuesami
,

/ ,

4

Tied

/r,

We have frankly been very disappointed by this process.
ord6

1,In addition to the U.S. Director's written and oral comments
/

"

in the Fund Board, Mr. Volcker has repeatedly-Nstressed our
concerns in discussions with the Managing Director and top
D:)
/
1
=7
s--c7
7 ;:r4!
staff of the Fund, and with a number of Executive'
Th; 4(1,,,r,,:cr

,

k 0,04, /

Mor-oom4r,The substantive views now put forward in writing by
the U.S. Director are entirely consistent •with those which
have been articulated publicly for many months by high U.S.
officials,

in

particular—by- Mr. Volcker who has made a number
44

"f7fe

Va Ire

of public statements on these issues.

Moreover, we do not
d •

r

/

believe the U.S. Director's proposals are belated, since we
have only with reluctance resorted to this method of advancing
our views after repeatedly attempting to have some account of
Xr,i/

lette
?Yr

them taken via the more usual processes of the Fund,
.
j

a b- c

ine4CePii

gineev.,the report in question is to an important extent
--ie00-7eff

IT

t k,,e$)

e47Ø4 :›17A 47,01 ,
1

71'

a report on the U.S. dollar in the international monetary

olio 7- 1°4
!
41

pfic,,pcfsa.t,
fve.51:#045
.0'.41,e'fornipcs

system, and even more generally a report on the role of the

,,
rite /g/.6ect,7,<,

ij

ri/05 $1.7r

/to ir,
.


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Federal Reserve Bank of St. Louis

'

frd

wyld

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-),%-

t.,,lotie7
r7,44/.k.

f ei

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-4-

Uniten_States in the international economy, it is surely approel:0Sn
f7:77Le3jeJ v
priate for the United States to have views on all the principal
questi-oRs.

Indeed, I would have thought that others would have

a particular interest in- knowing -U:5. views and taking them
into account, rather than in regarding them as unweliFy,me.
Moreover, you as Minister in a country which has on many
occasions in the past put forward views which were not widely
shared, will understand mete clearly than many others the
strength of our conviction that we must present our views as
clearly and bluntly as we can, even if they are not popular
with others.
Mr.---Mtntster, if the Fund report in fact left open an
adequate range of realistic options for an appropriate reform
of the international economic and monetary systems, we would
be satisfied.
/

That is all we seek.

report does not de-that.

But we are convinced the -11Sr-

We are frankly very disappointed

at this, and feel uncomfortable that the existing situation
•,4 ,
forces us to attempt to open options, some of which may appear
unwelcome to our partners and may in fact--after careful study-not be ideal from our own point of view.
It would be a source of regret to me if our motives in
this matter were misunderstood.

They are very straightfor-

wardly to focus on what we consider to be the fundamental


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Federal Reserve Bank of St. Louis

-5-

questions underlying the reform issues, and to proceed with
dispatch into realistic study and negotiation.
14

•

<-1•-• 1• 4:,,C
•

7/,
;

;


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Federal Reserve Bank of St. Louis

140

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4717_

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,
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Department of State

UNCLASSIFIED
PAGE 01

BONN 08976

TELEGRAM

743

222109L

3111

, 19741

84
ACTION EUR-25
INFO

OCT-01

CIEP-71
CEA-02

AGR-20

AID -28

CIAE-00

NSAE-00

RSC-01

TRSE-00

LAB -06

SIL.01

SAL-02

SS -20

STR-08

NSc-10

COm-q8
xmB-06
P-03

RSR-01

E-15

FR13-02

uPIc-12

PRS-01

TRsY-11

USIA -1

/234 W
017386

R 22,183zZ JUL 71
FM AMEmBASSY BONN
TO SECSTATE WASHDc 3973
INFO AmEmBASSy PARIS
UNCLAS BONN 8976
SUBJ: ERTL FRENCH REVALUATION
PASS TREASURY AND FEDERAL RESERVE
TODAY'S INTERNATIONAL HERALD TRIBUNE REPORTS REMARKS 1ADE
BY MINISTER OF AGRICULTURE ERTL DURING AN INTERVIEW AITH THE
GERMAN MAGAZINE wIRTSCHAFTSWOCHE. (FOR THE PORTION OF INTERVIEW
ON FARM POLICY, SEE SEPTEL.) THE IHT ARTICLE, HEADLINED
"FRANC REVALUATION CALL". STATES THAT "ERTL SAID TODAY HE THINKS
3
. ALUATION OF THE FRENCH FRANC IS THE SOLUTION TO CURRENT
INTERNATIONAL MONETARY DIFFICULTIES."
R. AE CANNOT FIND SUCH A STATEMENT IN THE TEXT OF THE INTERVIEW.
ERTL REFERS TO RUMORS OF A REVALUATION BUT MAKES HIS COMMENTS
ON THE BASIS OF "IF IT WERE, TO OCCUR." THE IHT ATTRIBUTION
APPARENTLY REFERS TO A RESPONSE TO A QUESTION OF WHAT WOULD HAPPEN
IF ENGLAND DEVALUED IN FALL '72. ERTL SAID "THAT IS AN INTERESTING
SPECULATION. BUT NOW I AM FASCINATED MORE BY THE IDEA OF A
REVALUATION IN FRANCE. FOR ANYTHING ELSE BRINGS INCREASED
GRIEF AND VERY MANY UNSOLVED PROBLEMS."RUSH


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UNCLASSIFIED

ift,(

Last August 15 the United States embarked on a program
to restore its external economic strength and to reform the
international monetary system in the context of an open and
liberal world trading order.
In the intervening months considerable progress has
been made toward our objectives:
--A major and unprecedented multilateral exchange
realignment was negotiated in the Smithsonian Agreement.
--Trade liberalization steps of tangible value were
concluded kith Japan and the EC on a series of
• short-term measures.
--Arrangements were introduced to permit wider bands
of fluctuation for market exchange rates around the
officially stated exchange rates, facilitating the
exchange rate realignment and potentially an improvement in a new and more permanent monetary system.
--Japan and the EC joined with us in a firm commitment
to proceed with comprehensive negotiations in 1973
looking toward further reduction of trade barriers.
--And a beginning has been made toward an extensive
reform of the international monetary structure.
We have made clear that we expected our balance of trade
and payments to continue in deficit during an interim period.

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Federal Reserve Bank of St. Louis

- 2 Our trading accounts in the first five months of this year
have in fact shown deficits totaling $2-3/4 billion.
One reason is that, as experience by other countries has
shown, the initial price effects of currency realignment on
imports and exports are usually perverse.

Moreover, cyclical

factors have been less favorable to the U.S. balance this year.
As I pointed out earlier, our economy is now growing
vigorously.

In contrast, many of our major competitors are

in a period of relatively slow expansion.

As their economies

pick up, as they expect, so should demand for our exports.
Meanwhile, the relative price performance of the United States
is helping to reinforce the effects of the exchange rate realignment.

We are not satisfied with our performance--but it is

improving, and better than others.

We are determined to make

additional progress in the future.
All of these factors suggest that our basic balance of
payments position should improve in the period ahead.

But

I believe it is evident we cannot afford to relax in the
thought that the changes in exchange rates alone provide an assured and lasting solution.

To take advantage of the opportunity

afforded, we must manage our economy properly, we must increase
its vigor and competitiveness, we must reduce barriers abroad
to our exports.

We must obtain structural changes in our

present
international economic relationships to better reflect the

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Federal Reserve Bank of St. Louis

- 3 balance Sf power and responsibility.
Oor overall balance of payments thus far this year has
been influenced by uncertainties in foreign exchange markets.
In recent months there have been periods of calm and periods
of speculation in these narkets.

There was sporadic market

uncertainty through early March--during what was an inevitable
period of testing of the Smithsonian Agreement.
remained calm for 3-1/2 months.

Markets then

During this period a gradual

unwinding of speculative positions and a reflux of short-term
funds roughly offset--or more than offset--the continuing
deficit in our trade and other accounts.
This calm was disturbed in the latter part of June, when
strong speculative concerns reemerged at the time of the U.K.
I ecision to float the pound.

We and other parties to the

Smithsonian Agreement judged--and announced--that the speculation associated with that Brsh move need not affect the
basic exchange rate structure established at the Smithsonian.
That continues to be our firm view.
Consistent with our view of the validity of the Smithsonian
rates, we decided that some intervention from time to time in
the exchange markets could provide a helpful deterrent to
unwarranted speculation and to demonstrate the firmness of
our view.

This intervention is entirely at the initiative

of the United States, and will be undertaken in such times

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Federal Reserve Bank of St. Louis

- 4 and amounts as we deem appropriate in the light of speculative
tendencies.

This action does not in any way restore the con-

vertibility of the dollar into reserve assets which is among
the issues to be considered in longer-term reform.

Our basic

policy approach toward monetary reform and the necessary
efforts to achieve sustainable equilibrium in our balance of
payments is unchanged.
The market developments emphasize—if emphasis were
needed--the urgency of moving ahead with monetary reform.
We must get on with this important work, and we must get
the job done right.
Negotiations on reform of the monetary system have in
a real sense been under way for some time.

A process of dis-

cussion--much of it informal--among national governments has
provided an opportunity to exchange views on the objectives
of reform, and to clarify some of the major issues.

Through

this process, we gain understanding and lay the groundwork
for developing the necessary consensus on which lasting
reform must be based.
To handle the more formal negotiations of monetary reform,
nations are now in substantial agreement on the formation of
a "Committee of Twenty" under the general auspices of the I1T.
The United States has played a major role in establishing the
membership,
new committee. We believe that with its representative

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Federal Reserve Bank of St. Louis

- 5 and its breadth of approach enabling it to consider trade as
well as monetary questions, it is well equipped for the
challenging task of monetary reform.

We expect the Cornittee

to begin its work at the time of the Annual Meetings of the
IMF in September.
If we are to find workable and lasting solutions to the
difficult problems of international monetary reform, we will
have to deal with fundamental issues of importance to the
national interest of the United States and other countries.
Too often the smooth functioning of the monetary system is
seen as simply a technical problem, involving nothing more
than a search for efficient monetary devices.

But discussion

of these devices, important as they are, must not distract
our focus from the basic issues:
--We must introduce into the trade and payments system
appropriate incentives for both surplus and deficit countries
to adjust.

We need to deal with a fundamental bias in a world

in which most advanced countries like to run payments surpluses,
and there is little or no compulsion on them to correct such
surpluses.

For too long, the U.S. has provided the counterpart

to those surpluses in its own deficit.

To achieve a stable

system, that bias must be eliminated.
--We must deal with the appropriate role of capital controls.
Views on this issue vary widely.

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Federal Reserve Bank of St. Louis

We have seen controls increase

-6 over the past year.

This is distasteful to those like

ourselves who strongly favor a system in which capital can
move freely in accord with market factors, without reliance
on controls.

Yet, others have philosophical and practical

differences, and we all need to be concerned with the need
to deal with erroneous speculative fervor so evident lately.
--Another basic issue concerns the appropriate degree
of freedom for domestic policy and particularly monetary
policy,

In an interdependent world, no nation can be an island

unto itself.

Monetary changes in one country, in particular,

affect others. But a system is doomed to failure if it relies
on a high degree of policy coordination that countries are
unwilling to subscribe to in practice.
--We must come to grips with the problems of fitting a
European monetary union, or other grouping with particularly
close ties, into a worldwide system.

It is a time of great

change in Western Europe, and the implications of this change
for trading and monetary arrangements are not yet fully understood.
These points illustrate the far-reaching nature of the
issues that must be examined in the negotiations ahead.

We

intend to exercise our leadership to ensure that these issues
are faced so that the monetary system which emerges will be
sound and durable and fully meets the needs of a growing and
changing world economy.

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Federal Reserve Bank of St. Louis

7/21/72

DEC

SSIFIED

AUTHORITY:
rson.1.111TMI4.1510.6

.6k

DATE:

April 13, 1971
SEC'REMARY
P. A.

cottn LIN

Volcker

Interest Rate Incentives and Exchange Guarantees on
roreign Dollar Uoldings
Az a result of the large dollar accurulations in foreign
central banks, nervousness as to exchange rate stability anl
relatively low interest earninels on U. S. stlort-term paper,
we are coming under increasing pressure to take special action.
Cerwany and Switzerland have before us specific requests
and it may be assumed that anything conceded to one country
will becoi,e cieneralizea unless obscured in some way.
The prot,ositions before us take three forma
1.

1i tier than the going short-term interest rate on
marketable U. S Treasury securities,
2. greater use of exchange guarantees by means of swaps
and foreign currency denoYinated securities1
3. interpretations of existinq guarantee arrangements
to provide twre. (at least more definite) protection
to other partiea.

I. jne way for foreiqn central banks to obtain higher
interest earnings is for the to purchase longer term
Treasury securities, or even higher-earning U. S. Agency
securities.
For instance, if Germany were willing to buy a
special issue of three-year notes, we could readily provid
e an
interest rate of 5%, which is comparable to the going market
yield of Treasury marketable securities of sirpilar maturity.
The stumhling block will be the desire of the forei(in
central
bank to retain short tarn liquidity while earning a nedium•term
rate.
This problem has been coms_romisel at tics in the past by
providing for ref.leption irior to maturity only in the event of
a shark) shift in money flows which greatly reduced the
reserves
of the country buying the security. For inntance, for
some tiwe
we have had medium term dollar securities oatstanling
with Canada


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Federal Reserve Bank of St. Louis

CO

and other countries that can be liquidated before maturity if
their total dollar holdings dropped toward the levet needed for
working balances.
One possibility to meet the German requests, would be to
permit redemption if their reserves fell by, say, one half, or
from the present $16 billion to $8 billion. (The Germans oenefitted
from a much more liberal trigger on some DM denominated bonds
sold than as part of earlier offset aereements.)
Alternatively, or possible as an additional feature, redemi,
tion could be provided only after considerable notice - say
3 or 6 months.
2. We have for a decade given exchange guarantees in limited
amounts in the form of swaps, foreign currency denominated securities
and forward exchange operations. They have been designed to give
others protection against a Jevaluation of the dollar vis-a-vis
the recipient's currency, but not to give them protection against
a revaluation of their own currency.
We remain under pressure to continue these operations under
the existing Federal Reserve swap network, particularly by
Belgium, the eetherlands and Switzerland. Germany, which for a
number of years. has not availed itself of these guarantees, has
now suggested their use. Our potential exposure could be substantial if these guarantees became widely generalized, depending
in part on the interpretation given in (3) below. Consequently,
if cpncessions are nade in this area, we should find sowe method
of limiting this exposure.
3. The guarantees described above and our protection against
the revaluation of others have been set down erimarily in terms
of clear-cut unilateral changes. Mere is now an attempt by
others to clarify (and depending upon one's present interpretation
to extend) the coverage. Specifically, they would consider the
revaluation protection to the Lo. S. invalid if the U. S. first
suspended gold sales and they allowed their exchange rate to
appreciate in response.
Given the negotiating history of these arrangements, there is
some appeal to their contention. since we would have taken an
overt act in ceasing to support the dollar in our way - freely
buying and selling gold. It could be said that the dollar was
floating and it was the dollar depreciating. or it might ba
argued both currencies are floating and the losses should oe
shared.


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Federal Reserve Bank of St. Louis

- 3 The wore attractive we make these guarantees the more
pressures we will be under to enlarge them.
Possible Course of Action
Should we wish to concede any additional guarantees to
Germany, it might he possible to do so without creating a
precedent for others and limit the volume by placin&j them within
the military offset arrangements currently under negotiation.
Offset arrangements for 1968 and 1969 did provide for the
purchase of OM denominated bonds by the Dundesbank. This was
done on the grounds they were nonliquid instruments and statistically improved our liquidity balance of payments, notwithstanding
the aforementioned trigger point provision. This turned out to
cost us about $20 million after the last German revaluation. But
further use of this technique, in limited volume, might be
justified if it were coupled with an interest rate below the
going market rate, and if the protection did not include overt
German revaluation.
Our basic negotiating position on the next offset arrangement
covering fiscal 1972 and 1973 would call for payment by Germany
over the next two years of about $1.7 billion out of about $2.5
billion of U. S. expenditures in Germany (ex any credit to Germany
for increased money spent on their own forces). The -gap is thus
at least $800 million based on our bargaining position and will
probably be over $1 billion in the actual settlement.
It would be easier, if we wish to concede something to Germany,
to convert the present $1,650 million of short-term special
Treasury certificates they hold into longer-term notes at the
going
market rate for longer terms, but with a stringent trigger point
of the kind proposed above.
A Bundesbank official will be making inquiry of us on Thursday
as to our thinking on their earlier request. The proposals above
fall far short of their thinking. However, I see some advantage
in offering at least the medium term dollar notes (with stringe
nt
trigger), but would be willing, in the last analysis to provide
up to $1 billion DM denominated notes, at a favorable interest
rate, as part of the offset.
Finally, we must respond to the Swiss and German requests for
clarification of the present guarantees. I would propose a
limited response along the lines attached.


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Federal Reserve Bank of St. Louis

CONTIAL
.10.91777;ttik
00
4 >/1
,r/7
P".

MAJOR ELEMENTS OF PLAN X

A.

Exchange Rate Regime

otst)sk
vtgts.

1. General rule: Countries will declare central values
for their exchange rates expressed in SDR's, with permissible
margins of 3 - 4 percent on each side.
2.

Floating rule:

With permission a country can float:

a) transitionally to new central value
b) indefinitely if it declares willingness to avoid
"balance of payments" controls on capital and trade
and obeys more restrictive reserve management criteria-both subject to special surveillance.
3. Unit rule: A group of countries wishing to maintain
narrower margins and declaring intention to move toward reserve
pooling, can be declared "monetary and trading unit" and treated
as single country.
4. Intervention: Countries with central values will
be expected to intervene in their domestic markets to avoid
depreciation beyond lower margin of currencies of leading
trading partners with central values.
B. Reserve Regime
1. "Primary reserves" would consist of gold, SDR's and
IMF gold tranches.
2. Each country would have a "normal level" of primary
reserves related to IMF quotas (e.g., 4 times each country's
quota).
3. Total world "normal" reserves must equal total world
primary reserves. Dollars and other foreign exchange can be
converted into SDR's during a limited "open season." SDR
allocations will make upciny shortfall of primary reserves
elow world "normal reserves."
•
4. Countries acquiring foreign exchange can present it
to the issuing country for primary reserves, so long as both
eountries are maintaining central rates.

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Federal Reserve Bank of St. Louis

pENTIAL
-25.

Negotiated official credits permitted.

6. Foreign exchange holdings are neither encouraged nor
prohibited. Countries would need to respect any limits
established by the issuing country, and U.S. would negotiate
limits on foreign official holdings of dollars. Foreign
exchange holdings include all commitments and forward controls.
-7! Adjustments would be called for at certain thresholds:
a)

total reserves (primary plus forex)of a country at
50 percent of "normal level": devaluation required-3 - 4 percent per year without approval, more (subject
to approval) if underlying conditions so justify.

b)

primary reserves at 75 percent of "normal level":
devaluation permitted--3 - 4 percent per year
without approval, more (subject to approval if
justified.

.
c)

reserves at (unspecified) level and after
drawing of say 50 percent of IMF and capital controls in effect: surcharge permitted.

d)

primary reserves at 150 percent of "normal level":
revaluation required--at least 3 percent per year.

e) primary reserves at 175 percent of "normal level":
no right to convertibility.
f)

total reserves (primary plus forex) at 200 percent
of normal level and maintained for period (e.g.,
6 months) would indicate persistent surplus country,
which would be expected, e.g., to increase aid,
liberalize imports and unless corrected, subject to
discriminatory restrictions (e.g., surcharge).

8. Gold would be sold by official holders only at
official price to IMF, which would be free to sell in private
market with profits going to IDA.
9. SDR's created for "open season" conversion of foreign
exchange should be extinguished, up to a fixed amount per year,
as the country with the currency liability obtains primary
reserves above its "normal level." Total SDR volume would
be maintained by equivalent new allocation distributed by the
usual formula.


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Federal Reserve Bank of St. Louis

mewrrinIrwrIsimv.Av

40
(3-11-A
-310. Holding limits and restrictions on use of SDR's by
official institutions would be abolished.
11. An SDR aid-link could be grafted onto the system,
but would not be proposed.
a)

No country expected or compelled to maintain
restrictions on outward flow of capital (though
permitted to do so) except that countries applying
surcharges (in addition to IMF borrowing) should be
willing to apply internationally sanctioned capital
controls.

b)

Countries with below normal reserve holdings over
a period should not be permitted restrictions on
inward flow of capital imposed for balance-of-payments
purposes. (Restrictions defined to include special
interest incentives or penalties.)

c) In other circumstances, presumption (but not prohibition) against use of controls on inward flows. Presumption expressed by international review and surveillance when controls enforced for more than six
months, and maintenance justified only by showing
exchange rate not fundamentally undervalued. Sanctions, including elimination of right to hold foreign
currencies before other countries could discriminate
on trade, should be included.

C.

d)

Two-tier exchange markets would be treated as form
of capital control and treated as above.

e)

Nations should apply consistent set of regulatory
standards on "foreign banks" to assure equitable
treatment of Euro-currency markets.

Constitutional Regime

1. Completely new international monetary agreement needed
covering monetary and related broad trade principles.
2.

Parallel restructuring of GATT required.

3. Articles of two institutions should interact; joint
meetings and working parties should be sought.


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Federal Reserve Bank of St. Louis

CONFIDENTIAL

CONFIDENTIAL
- 44.

Monetary organization should be "politicized"

--maintain Excutive Directors at Deputy Minister
level
--Keep C-20 in being.


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Federal Reserve Bank of St. Louis

•

0

•

7/31/72

•

DRAFT.
7/14/71

Mr. Dale
' Statement on Limited Exchange
Rate Flexibiity
Monday, July 19, 1971

As we begin this new round of discussions on limited exchange rate
flexibility; it is important to enter seriously into the process of making
choices, Go-that the Governors_ateptember-Anlaualt,Mee44ng—ean-te_'
Trezented- withr,eonolugibihs, on which they can express their views in a
,.,-eareflilly_considered fashion.

With this in mind, the U.S. authorities

have now requested me to give a clear indication of the views they have
reached.

In what follows, a number of details and elements of precision

are mentioned in order to give a clear idea of the main lines of approach,
but in many instances these elements are tentative.
Wider Margins 6
A member of the Fund should have available to it the option of
The width of permitted margins under
,,,_ _-4.ca}i'l-t "Li.._
i .
this option should be sufficient to accomplish what is desired/11'It is
C 1.1.h.
1 ---t
ci.',.
thought that margins up to 2-'- to 3 per cent on either side of parity,
adopting a regime of wider margins.

either temporarily or for a longer period would be suitable.

A member

wishing to avail itself of this option should be able to do so simply
by notifying the Fund of its action, and the U.S. authorities have in
mind that the meml)er doing so should also be required to indicate to the,
Fund the reasons for which it has chosen to avail itself of this option.


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Federal Reserve Bank of St. Louis

-2-

The institution of wider margins within the limits mentioned would
not legally require the Fund's approval.

However, it is envisaged that

the Fund, upon the proposal of a member, of the Managing Director, or of
an Executive Director) should have the right to challenge the member's
use of wider margins on the basis that it was inconsistent with the purposes of the Fund.

In examining such a proposal, the Fund would pay due

regard to the extent to which the member utilizing the wider margins was
faced with actual or potential disequilibrating movements of mobile capital, whether in an inward or outward direction.

Thus) the Fund would have

legal authority to withdraw the option for utilizing wider margins if it
determined that their use was inconsistent with the purposes of the Fund.
In practice it might be assumed that such a power to(494Alaw the use of
wider margins by a given member would be utilized only in the event a member

A

were utilizing this option in a go

44e

irresponsible manner, and this

might suggest that the power to withdraw the option would be used only
after some experience had been gained of the member's actual behavior
in applying the option of wider margins, though the legal language of the
amendment for this purpose should enable the Fund to act to outlaw the
option for a member at any time after it had been invoked.
There would thus be two ways by which a member could be brought to
discontinue legally utilizing wider margins:
1.

By deciding on the basis of its own reasons that it wished
to discontinue utilizing this option, and notifying the Fund
of this decision; or

2.

fl-e)Ler.
By a decision of the Fund to withdraw the availability to
that member of the wider margin option, taken on the basis of


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Federal Reserve Bank of St. Louis

L

-3a proposal that the continued availability of this option
to the given member was, in all the relevant conditions,
inconsistent with the purposes of the Fund.

A wider margin amendment which incorporated the substantive features
described above (and also those mentioned in the following section) would
involve two general attributes which are worthy of particular mention:
1. Although it would be intended that a member could utilize
the option of wider margins automatically and with full
confidence when its circumstances made this appropriate, it
would still leave the existing practices based on the present
one per cent provision as, in a sense, therdost normal"
situation envisaged. by the Articles; and
2.

It would establish a system of rights and obligations under
which both members and the international community -acting
through the Fund could protect their important interests.

Consequential-Changes
In connection57ith the ig.mendment of the Artj les favored br the U.S.
authorities, they would also

ean toward supporting four consequ ntial

provisions intrcduced by the staff in SM2C71/104.

The U.S. pos tio

on

e e four\
i sues has n t as yet, however, ,been given\- „e same scrutiny
\
as o her matters mentioned in this

\
tatement, and, accordingly, the views

\
I am expressing in this section are s 'la quit

1.

A
tentativ

Th

U.S\uthoritis do not have in mind. making the existing
\
N
\
\
\
syst m more rutrictive for those member which do not avail
\
\
themselves of the option to utilize wider

\
argins and accord,\

\
ingly they are willing to consider thI incorporation into the


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Federal Reserve Bank of St. Louis

-4rticles of a provision which in substance would place the

1959

Decision (No. 904, July 24, 1959) into the Articles by

Indicating that the cumulation of margins could not exceed
twice the appropriate margins, whether those were one per cent
or (under the wider margin option) up to

21 per cent.

2. For the purpose of expressing this position in the Article
s,
the feeling is that the "intervention currency" approach,
along with the definition in Attachment
"V to SM/71/104,
rather than the " oreign exchange value" approach, might be
preferable.

3.

There is support for

ic,,e

tec

Attachment IV to SM/71/10

ical amendments contained in

which are designed to facilitate

A

the operation of the Ge er 1 Account in connection with wider
margins.
4.Thereisalsosuportforaprovision such as that put forward
\
in Attachment VI to SM/71/104, to place a limit on spreads
between buying and selling rates, and tentatively the feeling
/
is that the maximum spread should \
not exceed two per cent of
/1
'
\
parity, which is the same maximum degree
of freedom in this
\
.respect that members presently have under
the existing
\
Articles.


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Federal Reserve Bank of St. Louis

I

•

Transition-11 Floats
Wider margins of the kind described above should, with appropriate
policies of official intervention, assist materially in coping with problems

presented by the movement of interest-sensitive capital.

In addition,

of course, other measures not involving exchange rate action can also be
utilized and various alternatives in this field are presently being
studied here in the Fund and elsewhere.
On the assumption that a combination of the option to institute wider
margins as described above along with other measures not entailing exchange
rate action could be expected to deal reasonably satisfactorily with
interest-senstive capital flows, the U.S. authorities see considerable
merit in the view that the legalization of fluctuating rates (or of
deviations from observing the margins) for the purpose of ooping with
capital flous would raise difficult problems of international surveillance
and control.

Nonetheless, there may be po:oplems.-of uncertainty as to the
•i,-tC L
•-•fk/
appropriate new i_r value Gr-of speculative pressures. These conditions

A

would suggest that a floating rate should then be availed of only as a
transition between maintenance of authorized margins around par values
established in accordance with the Articles of Agreement.

The U.S.

authorities are inclined to support a provision in the Articles fa. this
-

specific and limited purpose.
A member would be authorized to institute a fluctuating rate if it
represented to the Fund that it had an actual or emerging fundamental
disequilibrium, and the Fund concurred with this representation.


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Federal Reserve Bank of St. Louis

The
•

111•111mimmik

-6purpose of the transitional float would therefore be to move in an orderly
manner to a par value around which the authorized margins could be sustained.
During such a period as the member continued to float, the Fund would
be required by the Articles to review the country's situation not less freqtr.ntly than at quarterly intervals, with the first such review to take
place not later than three months after the beginning of the float (although there would of course be nothing to stand in the way of such a
review as quickly as the Fund might consider desirable).

On the basis

of any such review, the Fund would have authority to approve (or not
object to) f-cmtinuation of the float, or to prescribe conditions applicable
to the float in terms of (a) magnitude of departure from parity, (b) length
of the float, or (c) such other conditions as the Fund would deem appropriate in the circumstances.

In addition, the Fund could decide that a

par value, having in mind the authorized margins around it, could now be
sustained and in that event the Fund would be authorized to withdraw
authority for the member to float," in,vhich---ease-÷f th-e-member--perz-isted--in
floatinErit:Lwauldateting- outsid-e—thEm.
In its reviews of the situation of a member which was utilizing
a transitional float as described here, the Fund would be required to pay
particular attention to any evidence which suggested that a competitive
L.-

.)

depreciation was occurring. AThe---inest------importa.nt fact.or..._is- that inter(
nationally agreed standards for behavior liheu-M. be developed and underc:-TtY
_,
/CL 9L PLC: Liz
stood. Irr reviewing-particular_ situations _aswell_as--id considering

a,)

k

•

s -general-policy-in-this field, it is 0_to be_hoped that the Fund would
ge-velop-gradually_a_ well-eonsidererL body of operative-doctrine which would
guide-eountries—making-use___-of---thl-s- provision.

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Federal Reserve Bank of St. Louis

•

-7-

In any event, a par value to be observed by the member upon discontinuing its float would need to be concurred in by the Fund, whether this
discontinuation resulted from an initiative by the member or by the Fund.
ea--4-Le
In this connection, one sh•etad- perhaps not rule out the possibility of
returning to the par value in force when the float began, since it would
be possible that the fundarmntal disequilibrium which was recognized as the
s basis for first instituting tha. float had been eliminated in the interim,
Ictc •)
:10..*Cfr, - t
jtd
or that-i-t - turned out tel be - persi-stent.
Small and More Frequent Changes in Par Values
The U.S. authors ties are of the view that it is not necessary to
envisage a specific provision in the Articles on this subject.

Their

view on this recalls the conclusion in last year's Report on exchange
rate flexibility which made it clear that smaller and more frequent
changes in par values than have generally occurred in the past are perfectly feasible under the existing Articles for countries that wish to
make such changes.
Conclusion
The U.S. authorities would be prepand to support an amendment which
inclus3.ed the points of substance mentioned above under the headings of
wider margins, consequential changes, and transitional floats. 'It Ars
their hope tli.Q.t supportIvwill becoP evident
that this polic
this ye a-

could be

looking

%


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Federal Reserve Bank of St. Louis

dopted by the time

oanl a

or such

n approckch, so

the Go ernors' 4 etincr,

rial amen cent as s

bn as p tkcticable.

-8-

I would invite and welcome reactions of my colleagues to these point,so,
.0
_and -would -1-ike—to-reettest -that the staff provide draft legal texts,whi-eh
C:!tx_t_tcl

woadd—impleinent—thee-e- _featu-res.

Fina ly, I recall that ' a recent disF''ssion some Direc-1 rs expressed
the hope th

some practicable sanctions could

developed in th

sho t of compuls\
withdrawal which is hardly u
poten

al interest o

exchange

...e__-0---t-•-•.-1-4.:_
‘.. .6. i_tivl .:._..LL,_

''''.-4--

i
.r
‘
.
C
.
C,%.%

I recognize the
on with greater

rward. with interest to further

it.

!,...it: __A--... ) .4‘C--- C__/.

,.<.•,.

•

bject in connec

ate flexibility and will look

discussion o
_V

this general

f

-4
- -74-17

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COKkEC.TIONS MADE Oim THIS COPY MUST 7,5-,E MADE 0;4 ALL COPIES ''

L
OUTGOING
...61631•4=1111114

MFG. tt-ti7

Foreign Servicc of the
United Sts of America

Amembassy PPRIS

.0/1:11102..11.
YIK
,14.11.g.r.V.V.5....K40110RtsC.W.M....C222.1.W,MIlle4192MVOILZ,NOK/^..1..GC,2•4 7,42,11.1■911011MOINILAVVIA4101l.11
.

UNCLASSIFTM
Classification

Charge:

Control:
Date!

ACTION:

SECSTATE WASHDC

INFO:

Amembassy BONN
BRUSSELS
THE HAGUE
LONDON
LUXEMBOURG

Amembassy ROME
USMission EC BRUSSELS

PARIS
PASS TREASURY AND YILDERAL RESERVE
SUBJECT:

French Finance Minister Outlines French Position on
International Monetary Questions

In statement to Economic Council July

7,

Finance Minister Giscard

d'Estaing outlined French position on international monetary problems after Bonn talks as follows, according AFP:
1.

France refuses link European monetary problems to international

monetary problems and places priority on settlement European situation, first through return of DN and guilder to fixed parities and
then through narrowing intra-EC margins.
2.

Solution of international monetary problems requires:
(a) First, "study re financing of US-B/P deficit."
(b) Agreement on common doctrine re conditions for c/eation of

additional liqutdities.
Drafted by: FIN:DJMcGrew/ee

'7/8/71)

Approving Officer: MINECON:CGPetrovi

[concurrence: GE?:DECEly

UNUASSIF=
Classification

FORM F$ - 502

(8.65)

OFFICIAL FILE COPY

CAUTION - REMOVE THIS SHEET BEFORE STARTING TO TYPE - REPLACE SHEET AFTER TYPING


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'`CORRECTIONS MADE ON THIS COPY MUST BE MADE ON ALL COPIES"

\fL 1
TGOING

MFC. 8-67

Foreign Service of the
United States of America

Amembassy PARIS
.PtWr.urJMWCIO=WMWOWNOPIWAAIOSC--JNtaau..QWMMUPMIM.W.

UNCLASSIFn-D
Classification

Charge:

PAGE 2

Control:

•
Date:
(c) Adoption by IMF of rules codifying circumstances under
whicla, exceptionally, a currency could "floaL" as prelude to fixing
par value.

(Giscard characterized present floats of Canadian dollar,

DM and guilder as being "if not in violation, at least in disregard
of IMF rules.")
(d) Finally, there should be "careful and objective examination"
of widening of margins.

Drafted by:

Approving Officer:

Loncurrence:

FOPM FS -

UNCLASSIFILLD
Classification

502

(8.65)

OFFICIAL FILE COPY

CAUTION - REMOVE THIS SHEET BEFORE STARTING TO TYPE - REPLACE SHEET AFTER TYPING


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1

OPTIONAL FORM NO. 10
MAY 1962 EDITION
GSA FPMR (41 CFR) 101-11.6

JUL 1 3 1971

UNITED STATES GOVERNMENT

Memorandum
TO

Under Secretary Volcker
(Through: Assistant Secretary Petty)

FROM

1
Wilson E. Schmidt0

SUBJECT:

more on the Trade Consequences of Exchange Rate Changes

DATE:

July 6, 1971

The effects on their exports of manufactures of the
German and Dutch revaluations in 1961 have been examined by
Erich Spitaller in the International Monetary Fund Staff Papers
for March 1970.
Spitaller's method is to compare each country's share in
specified markets after revaluation with the share that would
have prevailed on the basis of trends between 1953 and 1960.
With respect to Germany, Spitaller discovers that German
exports to the EEC were 8.6% lower than they otherwise would
have been in 1961-62 and 9.5% lower than they otherwise would
have been in 1962-63. For Germany's exports to the industrial
non-EEC countries, the figures were respectively 12% and 16.5%
lower. In the markets in the rest of the world they were
14.8% and 22.5% lower. For the world as a whole German exports were respectively 12% and 16.6% lower.
With respect to the Netherlands, the reduction in her
exports in 1961-62 and 1962-63 are respectively for the EEC
market 9.6% and 7.1%, for the market in industrial non-EEC
countries 2.9% and 2.9%, for the rest of the world, 6% and
9%, and for the total world market 7% and 6.7%.

cc:


W 0-M
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Messrs. Willis, Lederer

Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan

6/22/71
Floating Rates

Alternative 2 - Initial Fund Concurrence Required
Proposed New Section 4(c) of Article IV

(c)(i)

[In exceptional circumstances and] in order to [cope with]
[correct] a fundamental disequilibrium a member may, with the
concurrence of the Fund, elect to permit exchange transactions
in its territories between its currency and the currency of
other members at rates outside the limits established by or
under Section 3 of this Article.

(ii)

A member proposing to make an election permitted under (i)
above shall notify the Fund and state the reasons for its
proposal.

(iii)

A member may terminate an election concurred in by the Fund
at any time by giving notice to the Fund.

(iv)


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Ninety days after the exercise of an election by a member
under (i) above, and at quarterly intervals thereafter, the
Fund shall review the consistency of the election with the
provisions of this A.gx.eement and the policies adopted under
them.

On the basis of such reviews, the Fund may withdraw

the authority of the member to avail itself of the election
provided for under (i) above, or may prescribe limits for
the margins for exchange transactions between the currencies
of members taking place in the territory of the electing

•111


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2

member or on the time period for which the election may
continue, or such other conditions as the Fund may deem
appropriate.

The Fund may also require members to impose

an exchange tax, in an amount determined by the Fund, on
all or part of any transfers of funds to any resident of
the electing member or on any purchases of the electing
member's currency, if the Fund finds that the electing
member's currency is undervalued.

aolk

6/22/71

Floating Rates
Alternative 1 - Initial Fund Concurrence Not Required
Proposed new Section 4(c) of Article IV

(c)(i) 5n exceptional circumstances an17 in order to fc-ope wit]

5orrecI,7 a fundamental disequilibrium

a member may elect to

permit exchange transactions in its territories between its
currency and the currency of other members at rates outside
the limits established by or under Section 3 of this Article.
(ii)

A member making the election permitted under (i) above shall
promptly notify the Fund of its election and the reasons for
its action. A. member may terminate such an election at any
time by giving notice to the Fund.

(iii)


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Ninety days after the exercise of an election by a member under
(i) above, and at quarterly intervals thereafter, the Fund shall
review the consistency of the election with the provisions of
this Agreement and the policies adopted under them.

On the

basis of such reviews, the Fund may withdraw the authority
of the member to avail itself of the election pro,ided for
under (i) above, or may prescribe limits for the margins for
exchange transactions between the currencies of members taking
place in the territory of the electing member or on the time
period for which the election may continue, or such other
conditions as the Fund may deem appropriate.

The Fund may

also require members to impose an exchange tax, in an amount


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2

determined by the Fund, on all or part of any transfers of funds
to any resident of the electing member or on any purchases of
the electing member's currency, if the Fund finds that the
electing member's currency is undervalued.

6/22/71
Limited Exchange Flexibility -- Wider Margins

Section

3

(a)
Present
Art. IV,
Section 3
unchanged

The maximum and the minimum rates for exchange trans-

actions between the currencies of members taking place within
their territories shall not differ from parity
(i) in the case of spot exchange transactions,
by more than one percent; and
(ii) in the case of other exchange transactions,
by a margin which exceeds the margin for spot
exchange transactions by more than the Fund
considers reasonable.
(b)(i)

Notwithstanding (a) above, a member may elect to
permit a margin for exchange transactions wider

New
Art. IV,
Section 3(b)


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than specified in (a)(i) above but not exceeding
2-1/2 percent [for such periods as it deems
necessary] in order to assist in coping with
excessive short term capital transfers [resulting
from differential rates of interest, speculation
or other causes].
(ii) A member making the election permitted under (i)
above shall promptly notify the Fund of its election
and the reasons for its action.

A member may

terminate such an election at any time by giving
notice to the Fund.

'-‘01

-


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_

(iii)

2

-

The Fund may withdraw [or modify] the authority
to make an election under (i) above if it decides
that such election is inconsistent with the
provisions of this Agreement and the policies
adopted under them.

• OPTIONAL FORM NO. 10
MAY 1962 EDITION
GSA GEN. REG. NO. 27

DUN

5010-106

UNITED STATES GOVERNMENT

The Department of the Treasury

Memorandum
TO

Under Secretary Volcker

FROM

Michael Bradfield

SUBJECT:

Reuss Resolution

Washington, D.C.

DATE:

June

3, 1971

I heard from George Krumbhaar of the Joint Economic Committee
staff that Congressman Reuss intends to introduce a sense of Congress
resolution today on the international monetary situation. The resolution would provide that if an International Monetary Conference is
not held it is the sense of Congress that the United States should
cease selling gold and allow the dollar to float following the German,
Dutch and Canadian precedents. After a period of float, during which
an equilibrium rate would be reached, the United States should thereafter intervene in the market in foreign currencies in order to
maintain the value of the dollar.
I also understand that hearings will be scheduled for the middle
of June at which you will be invited to testify. I am told that the
tentative title of the hearings will be "The Balance of Payments Mess."

cc:


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Messrs. Petty, Nelson, Willis, Sam Cross

Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan

/110'0Vie,

/

Jim 4 let.,1

UNCLASSIFIED

VG/Uncl. INFO/71-30

THE DEPARTMENT OF THE TREASURY

June 4, 1971

TO:

MEMBERS OF THE VOLCKER GROUP
AND THE VG WORKING GROUPS
Attached for the information of the Group is a copy

of a "Sense of Congress Resolution" introduced by
Congressman Reuss on June 3, 1971..

('
George H. Willis

Attachment


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UNCLASSIFIED


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Federal Reserve Bank of St. Louis

CONGRESS
1st

sEssioN
H• C

N.

IN THE HOUSE OF REPRESENTATIVES
June 3, 1971
Mr.

Reuss

submitted the following concurrent resolution; which was

CONCURRENT RESOLUTION
Resolved by the House of Representatives (the Senate
Concurring), That it is the sense of the Congress that, in
the event
that an international monetary conference is not promptly
convened, the Executive 1ranch should:
(1)

terminate its option; under the Articles of Agreement

of the International Monetary Fund, to purchase dollars held
foreign official institutions with cold;
(2)

following the precedent of the Federal Republic

of Germany, Canada, and the Netherlands, permit the dollar to
float until any disequili:)rium ha!: been removed, and then
support the dollar
(3)

exchanqc nnerations;

entertain claims for com,N7nsation for any resulting

loss to those forei.gn of- ficial dol!ar-holders, in the amount
of tneir dollaqholdings as of Junn 1, 1n71, who (a) coor:erate
in allowing rroier exciang(‘ ,,arities to he attained, and (I,)
affirm their willingness to a.,i(in hv
ta:.?r gold acr(_ement.

"arch, 196R, two-


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Federal Reserve Bank of St. Louis

92nd

SS
lst CONGRESESSION

H.CON.RES.

CONCURRENT RESOLUTION
Expressing the sense of the Congress on steps needed to
. strengthen the dollar

By Mr.. Reuss

v... commix:a 1.11111111 arms

3153645-b

rRor THE OFFICE OF:
eONGnESSAN HENnY S. aEuss
2159 RAYBURN HOUSE OFFICE BUILDING
WASITINGTON, D. C. 20515
Telephone 202-225-3571

FOR RELEASE:
5:00 P,-.
Thursday,
June 3, 1971

MIN 4 1971

REUSE CALLS FOR cLosInr nolo 9INDOT'7, LETTINO
DoLu.n FIND 11ET1 PARITY
Rep. Henry S. Reuss (D-'Tis.), Chairman of the Joint
Senate-Kouse Subcommittee on International Exchange and Payments,
calling for 'courageous action to restore a sound dollar', today
introduced a "sense of Congress" concurrent resolution calling on
the Executive to close the gold window, let the dollar float until
"equalibrium parity" is reached and maintained, and compensate
countries which "play the game- against any resulting exchange loss.
In a floor statement accompanying the resolution Reuss said!
"The dollar's current troubles stem fundamentally from
two causes: nersistent basic balance-of-payments deficits,
due to the Vietnam "ar and the resulting inflation; the
difficulty of trying to operate a gold exchanae standard
with $10 billion in gold against almost $30 billion in
claims against it held by foreign central 1-anks.
"These two Pchilles' heels make nonsense of the international
monetary system.
"The basic balance-of-payments deficit can he storned by
ending the Vietnam Incr'rel-IrIL no,., and by using price-wage
controls to restore a stable dollar.
'But correcting our basic navments imbalance is not enough.
The United States under the present system unnecessarily
crinplcs itself by its inability to alter its exchange
rate with other currencies. Three Administrations have
properly pledged never to raise the price of official gold.
It would make no sense to pay real resources for more, and
more expensive, gold from Russia and South Africa, only to
bury it again at Fort Knox.
"Another way to restore proper parities for the dollar
against under-valued currencies is for those currencies
to float or revalue unwards. "est roman and other
European countries are now doing this, and considerably
relieving the strain on the dollar in the process.
'But other countries, notably Jaran, refuse to revalue
their currencies trward, and an a result, Janan maintains

price advantage, enabling her automobiles,
https://fraser.stlouisfed.orga built-in
Federal Reserve Bank of St. Louis

2
and textiles to flood our
s,
ronic
radio-T.Ws, elect
more American companies
and
more
markets, and luring
pan investments.
in-Ja
madeinto artificially cheap
"American labor and management in the affected industries
are asking for massive import controls. Yet if we go this
route, it could be the ,end of free trade.
"Only by closing the gold window and letting the dollar
find a newer and sounder relationship with the yen and
ion
other under-valued currencies can we avoid the deteriorat
chy.
autar
trade
to
n
retur
a
and
of our trading position
ty.
"A second reason to close the gold window is simple hones
in
on
milli
$23
only
with
Many a country -- from Norway,
gold reserves and $646 million in foreign exchange reserves,
mostly dollars, to Japan, with only $532 million in gold
reserves and $3.2 billion in foreign exchange reserves,
on
mostly dollars -- has grown dollar-heavy in reliance
us
vario
our pledgE not to raise the price of gold. Yet
gold-bug countries -- like France, which last month
ng
grabbed another $282 million of our gold -- are getti
themselves into the position of preferred creditors.
w.
'So fairness, too, requires that we shut the gold windo
It is perfectly feasible to protect countries that 'play
nge
the game' by standing ready to compensate them for excha
the
ing
'Play
rs.
dolla
held
g
losses, if any, due_ to havin
game' would mean (1)not trying to frustrate an interim float
for the dollar, and (2) agreeing formally to abide by
the Mr-.2ch, 1968 two-tier gold agreement.
central
"This save-harmless agreement would apply only to
1971.
1,
bank dollar holdings accumulated prior to June
generally
With respect to currencies, like the Japanese yen,
believed to be under-valued, there will be a tendency
yen at
for private holders of dollars to unload them for
United
the
that
on
ipati
antic
in
the Japanese central bank,
d.
mende
recom
here
n
actio
the
States may in fact soon take
ble
eligi
be
not
would
ngs
Since such post-June 1 dollar holdi
bank
al
centr
ese
Japan
for save-harmless compensation, the
action
may very well conclude that it should take the same
a bit
for
float
as West Germany has taken -- let the dollar
a
be
would
until its fair parity begins to appear. This
ary
monet
good thing for the United States, for the World
system, and in the end for Japan, too.
United
"The proposal I make is for unilateral action by the
n by
actio
the
be
would
e,
cours
of
,
States. Far preferable
s-Reuss
multilateral conference proposed in the Javit
stability would
r
dolla
of
t
resul
Resoulution, though the end
bethe same.


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Federal Reserve Bank of St. Louis

-3The full text of the Reuss resolution follows:
CONCURRENT RESOLUTION
Resolved by the House Of Representatives (the Senate
Concurring), That it is the sense of the Congress that, in
the event that an international monetary conference is not
promptly convened, the Executive Branch should:
(1) terminate its option, under the Articles of
Agreement of the International Monetary Fund, to purchase
dollars held by foreign official institutions with gold;
(2) following the precedent of the Federal Republic
of Germany, Canada, and the Netherlands, permit the dollar
to float until any disequilibrium has been removed, and
then support the dollar by exchange operations;
(3) entertain claims for compensation for any resulting
loss to those foreign official dollar-holders, in the
amount of their dollar holdings as of June 1, 1971, who
(a) cooperate in allowing proper exchange parities to be
attained, and (b) affirm their williningness to abide by
the March, 1968, two-tier gold agreement.


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Federal Reserve Bank of St. Louis

•
7

.-

PROT: THE OFFICE OF:
CONGTIESS:"Ali HENnY S. 71EUSF:
2159 RAYBURN HOUSE OFFICE BUILDING
1 YAMTINGTON, D. C. 20515
:
Telephone 202-225-3571

FOR RELENT,:

T)PY

5:00 P.T.
Thursday,
June 3, 1971

REUSS CALLS FOR CLOSING GOLD 9INDOT^7, LETTING

DoLLAn FIND NET PARITY
Rep. :Tenn, S. 7cuss (D-r•Tis.), Chairman of the Joint
Senate-House Subcommittee on International Exchange and Payments,
calling for 'courageous action to restore a sound dollar', today
introduced a "sense of Congress" concurrent resolution calling on
the Executive to close the gold window, let the dollar float until
"egu4librium parity" is reached and maintained, and compensate
countries which "play the garner against any resulting exchange loss.
In a floor statement accompanying the resolution Reuss said:
"The dollar's current troubles stem fundamentally from
two causes: persistent basic balance-of-payments deficits,
due to the Vietnam "ar and the resulting inflation; the
difficulty of trying to oi?erate a gold exchange standard
with $10 billion in gold against almost $30 billion in
claims against it held by foreign central banks.
"These two Pchilles
monetary system.

heels make nonsense of the international

'The basic balance-of-payments deficit can he stonned by
ending the Vietnam.hcr, rrh7Igc noT7, and by Using price-wage
controls to restore a table dollar.
'Dut correcting our basic nayments imbalance is not enough.
The United States under the Present system unnecessarily
cripples itself by its inability to alter its exchange
rate with other currencies. Three Administrations have
properly pledged never to raise the price of official gold.
It would make no sense to pay real resources for more, and
more expensive, gold from Russia and South Africa, only to
bury it again at Fort Knox.
"7.nother 7-ay to restore proper naritics for the dollar
against under-valued currencies is for those currencies
to float or revalue umTards. T7est German and other
European countries are now doing this, and considerably
relieving the strain on the dollar in the process.
'But other countries, notably JaPan, refuse to revalue
their currencies upward, and as a result, JaPan maintains
1,11i1t=i0 nrice advantage, enabling her automobiles,


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2and textiles to flood our
electronics,
radio-T.Ws,
more American companies
an,
more
markets, and luring
into artificially cheap made-in-Japan investments.
"American labor and management in the affected industries
are asking for massive/import controls. Yet if we go this
route, it could be the end of free trade.
"Only by closing the gold window and letting the dollar
find a newer and/sounder relationship with the yen and
other under-valued currencies can we avoid the deterioration
of our trading position and a return to trade autarchy.
"A second reason to close the gold window is simp]e honesty.
Many a country -- from Norway, with only $23 million in
gold reserves and $646 million in foreign exchange reserves,
mostly dollars, to Japan, with only $532 million in gold
reserves and $3.2 billion in foreign exchange reserves,
mostly dollars -- has grown dollar-heavy in reliance on
our pledge not to raise the price of gold. Yet various
gold-bug countries -- like France, which last month
grabbed another $282 million of our gold -- are getting
them elves into the position of preferred creditors.
"So fairness, too, requires that we shut the gold window.
It is perfectly feasible to protect countries that 'play
the game' by standing ready to compensate them for exchange
losses, if any, due to having held dollars. 'Playing the
game' would mean (1)not trying to frustrate an interim float
for the dollar, and (2) agreeing formally to abide by
the Mch, 1968 two-tier gold agreement.
"This save-harmless agreement would apply only to central
bank dollar holdings accumulated prior to June 1, 1971.
With respect to currencies, like the Japanese yen, generally
believed to be under-valued, there will be a tendency
for private holders of dollars to unload them for yen at
the Japanese central bank, in anticipation that the United
States may in fact soon take the action here recommended.
Since such post-June 1 dollar holdings would not be eligible
for save-harmless compensation, the Japanese central bank
may very well conclude that it should take the same action
as West Germany has taken -- let the dollar float for a bit
until its fair parity begins to appear. This would be a
good thing for the United States, for the World monetary
system, and in the end for Japan, too.
"The proposal I make is for unilateral action by the United
States. Far preferable, of course, would be the action by
multilateral conference proposed in the Javits-Reuss
Resoulution, though the end result of dollar stability would
bethe same."


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•
Federal
Reserve Bank of St. Louis

-3olution follows:
The full text of the Reuss res
CONCURRENT RESOLUTION
entatives (the Senate
Resolved by the House of Repres
se of the Congress that, in
Concurring), That it is the sen
monetary conference is not
the event that an international
Branch should:
promptly convened, the Executive
er the Articles of
(1) terminate its option, und
l Monetary Fund, to purchase
Agreement of the Internationa
d;
icial institutions with gol
dollars held by foreign off


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the Federal Republic
(2) following the precedent of
herlands, permit the dollar
of Germany, Canada, and the Net
um has been removed, and
to float until any disequilibri
hange operations;
then support the dollar by exc
sation for any resulting
(3) entertain claims for compen
dollar-holders, in the
loss to those foreign official
as of June 1, 1971, who
amount of their dollar holdings
exchange parities to be
(a) cooperate in allowing proper
williningness to abide by
attained, and (b) affirm their
agreement.
the March, 1968, two-tier gold

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Document Type: News service report
Citations:

Number of Pages Removed: 1

Dow Jones. "Reuss Calls For 'Float' of Dollar But Treasury Quickly Disowns Plan." June 3,
1971.

Federal Reserve Bank of St. Louis


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(


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c_
1X


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Department of State

jNrLASSIFIED
PAGE 01

STATE

TELEGRA-1M

537

081158

84

ORIGIN TRSE-00
INFO

0CT.01
USIA -12
RSC.01

ARA-12
AID -28
XmB-06
NSC-10

EUR-20

EA -15

STR-08

E.15

,D-03

PRS-01

COm-08

FRB.02

INR-08

NSAE-00

CIEP-01

LAB.06

SIL-01

SAL-02

CIAE-00
OPIC-12

TRSY.11

L-04

H-02

cEA-02

I0-16

/227'R,

66643
DRAFTED BY: TREASIMACKOURtwILLaS
APPROVED ,3Y1 E/IFD: SWEINTRAU3
TREAS: PETTY
.......
.

P_Ig2340Z MAY 71
FM 5.E.C.SZAZZ—AASHDC
TO USMISSION EC BRUSSELS PRIORITY
AMEMBASSY THE HAGUE PRIORITY
AMEMBASSY LUXEMBOURG PRIROITY
AMEMBASSY LONDON PRIORITY
AMEMBASSY BERN PRIORITY
AMEMBASSY TOKYO PRIORITY
AMEMBASSY ROME PRIORITY
USMISS ION OECD PARIS PRIORITY
AMFMBASSY BONN PRIORITY
AMEMBASSY OTTAWA PRIORITY
AM EMBASSY STOCKHOLM PRIORITY
AMEMBASSY LIMA PRIORITY
UNCLAS STATE 081158
EC BRUSSELS PASS w$ cATEs
OECD PARIS PASS B. MACLAtp-4Y
LIMA FOP JSIADB DELEGATION PASS DR. WALKER
SUBJECT:
RESPONSE TO INQUIRIES CONCERNING EkCHANGE lARKET.
SITUATION
FOLLOWING IS TEXT OF RESPONSE TREASURY IS uTILazING IN REPLYING
TO PRESS AND OTHER PUBLIC INOJIRTES:


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ytm_ASSIFIED

c_T Op
.ct.h.f:N
K1

Department of State

6'p/tits&

TEl

UNCLASSIFIED
PAGE 02

STATE

081158

THE MARKETS APPEAR TO BE AOJUSTING IN ORDERLY FASHION
QUOTE;
TO THE VARIOUS DECISIONS OF SEVERAL EUROPEANICOUNTRIES 4ITH RESPECT'
NO IMMEDIATE ACTION By THE!
TO THEIR EXCHANGE RATE POLICIES.
THE TREASURY dILL CONTINUE TO
UNITES STATES IS CALLED FOR.
REVIEW WITH FOREIGN AUTHORITIES THEIR INVESTMENT NEEDS ARISING
ROGERS
OUT OF RECENT DOLLAR INFLOWS. UNQUOTE


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UNCLASSIFIED

• Williasa B. Dille
Bxe':utiveretr
•
Internati,dnal Mnetar

Mk 10, 1971

M,L.Larq Brathield
Azeistant G.2nera1 Counsel
Application of Article MX

Icu raised the quest1n of whether vier margins oould be set
some countries under Artiele XVI while all other countries w3uid
•e ,L'3nined to existing serene
The subect oi the
e of applicabilit;, of Article VI .caole
up in September 1949 when Belgium abanduned its par value end allowed
its ex,isiMeet rate to float. At that time the Legal Department
the
;,,ind advised that the provisions oi Article XVI should not be used
to release a sincle member ..r.AJm its exchange uarg# vbligations and
that Article XVI was intended on14 to deal with a situatical in whib
it mieht be desirable to relax requirements lor aii members. The
re,ei;tiQn of use oi Arti:Le XVI .Lor a single umber goes t, the heart
-3i the transitional iloat questim. If the iM oMa auth,..rize snipe*.
sion c margins tor a single member under ArtiAe XVI, then it could
authurize a transitional ilidet. As p.m &Iva'', the
has long taken
the position that it has no legal aAhorit t autll.mize a transitional
the aosenoe oi ms4 prciiloat. This conciusicz wa5 reagbed because
vision in the Arti.les lor a period oi traasiti,u inspite of the zommou
adoption oi this te,-.11aique lathe 1930,s.
One approw.:11 that yom might take is to are u a broadening
the oasiblor all molars 114, 1 percent and an additional broadening
another lixed perentage for (:ertain other membere. This might
overcome the argument tiat Artl,Ae XVI was intended to app.* to a
fAtuation is which it mall desirable to relax reqtarements .,or all
members.
Qd.

Gen-ral :7;unsel:MBradlield:hm 5/9/71


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Removal Notice
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sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: Press releases
Citations:

Number of Pages Removed: 2

International Monetary Fund. "Press Release No. 838." May 9, 1971.
International Monetary Fund. "Press Release No. 839." May 9, 1971.

Federal Reserve Bank of St. Louis


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(AN 26nen

Department of State

UNCLASSIFIED
PAGE 01

STATE

TELEGRAM

759

092035

83
ORIGIN EA.06
INFO

OCT-01

EUR-08

TRSE-00

TRSY.11

E.04

/030 W

66650
DRAFTED BY EA/J SPDAwKINsIAC
APPROVED BY E/A RAERICSON
CLEARANCE TREASURY: ERENDELL
P g_g_5235z MAY 71
FM SECSTATE WASHDC
TO AMCONSUL MUNICH PRIORITY

091522

UNCLAS STATE 092035
PASS TO CALVIN E. BRuMLEy WITH SECHETARY e)NALLYIS' PART'
ATTENDING ABA CONFERENCE.
FOLLOWING REPEATED MUNICH SENT sECSTATE INFO' OECD PARIS FROM
TOKYO MAY 25
OTE
TOKYO 4851
DELIVER AT OPENING OF BUSINESS
SUBJECT' TREZISE VISIT - REVALUATION,
REF' TOKYO 4850
ON MAY 25 THE EMBASSY ISSUEO THE FOLLOWING PRESS RELEASEi
"THE U.S. EMBASSY CATEGORICALLY DENIEStA NUMBER OF PRESS:
REPORTS. TODAY STATINGTHAT'THE USG HAS REQUESTED THEi GOU TO
REVALUE THE YEN. THE EMBASSY NOTES THAT r10 SUCH REQUEST, OFFICIAL'
OR UNOFFICIAL, HAS BEEN MADE.
"ASSISTANT SECRETARY TREZISE IN HIS METING, WITH THE PRESS
YESTERDAY RESPONDED TO A QUESTION ABOUT THE REVALUATION1OF THE
YEN BY SAYING, 'IT Is NOT APPROPRIATE FOR U.S. OFFICIALS
TO GIVE ADVICE' TO THE GOVERNMENT OF JAPAN ONiA MATTER WHICH
CAN ONLY BE DECIDED BY THAT. GOVERNENTI. HIS' RESPONSE


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UNCLy!..1fIED

_,,TEs,,

Department of State

TELEGRAM

uNCLASSI,F1ED
PAGE 02

STATE

092035

ACCURATELY STATES THE POsITION OF THE USG, WHICH CONSIDERS
THAT ANY DECISION ABOUT THE EXCHANGE VALME OF THE YEN RESTS
WITH THE 50VERNMENTOF JAPAN, SUBJECT ON( TO, THE RELEVANT
ARTICLES OF AGREEMENT OF THE INTERNATIONAL MONTETARY FUND."
MEYER UNOTE ROGERS


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•

UNCLASS.IFIEO

May 24, 1971

TO:

Mr. Peter G. Peterson
Executive Director
Council on International
Economics and Foreign Policy
Room 134, Executive Office Building

FROM:

George N. Willis
Room 3222, Main Treasury

SUBJECT:

Comments on Gaylord Freeman's Speech Entitled
Observations on the Dollar

Just before his departure for Europe, Under Secretary
Volcker authorized me to transmit to you the attached
comments on Mr. Freeman's speech.
Subsequent to receiving from you a copy of the
April 21 draft, we received from Mr. Dwyer of the First
National Bank of Chicago a later draft dated May 14, 1971.
The comments attached herewith relate to both drafts.

Attachments

ccs:


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Messrs. Volcker, Petty, MacLaury, Brumley, Cates,
Hennessy, Schmidt, Webster, Dale, Harley,
Wallich, Willis, Hirschtritt, Schaffner,
Widman, Nelson, Finkel, S. Cross, Pelikan,
Curtis, Lederer, Bradfield, Leddy and Weber
(The full text of the Freeman paper may be consulted
in Mr. Willis' office).
gir

Attachment I

May 21, 1971

Comments That Might Be Made to Mr. Freeman On His Speech
Entitled
Observations on the Dollar

1. The first half of the speech presents a very good
and relatively non-technical explanation of the balance of
payments problem. Publication of this part would be helpful and would contribute to public understanding.
2. The section entitled The Underlying Cause of our
Problem is also helpful. It points out that we no longer have
unique advantages that we had in the past. It may not give
enough emphasis to the fact that foreign countries have now
learned that they can penetrate the United States market for
manufactured goods on a large scale and that they have a growing
capacity to produce for export. This penetration was simply
not done prior to World War II in fields like automobiles, radio,
etc. Also, our wage compensation rates are about 4 times as
high as Japan's and 2 or 3 times as high as European levels.
3. We strongly concur with the emphasis in the speech
that a higher priority should be given to improving our
trade and current account position, not only by the government
but also by business and labor.
4. The speech is particularly useful in that it recognizes that improving our current account position in the
face of growing competition abroad will be a tough job.
5. In this field suggestions for action are always
more difficult than analysis of the problem. The following
are brief comments on the Freeman recommendations:
(a) The public must be convinced and prepared to
make some sacrifice. Comment: we agree but are not
sanguine on this point.
(b) Greater reliance should be placed on fiscal
policy relative to monetary policy in applying restraint
to the economy. Comment: agreed.


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(c) Savings should be increased through a "truly
high interest rate savings bond." Comment: we doubt
the effectiveness of such action in promoting overall
savings, as against diverting savings from other media.
(d) The tax burden should be shifted toward the
wealthy, in view of our probable unemployment problems.
Comment: the Congress has recently been through an
exhaustive reform of the tax laws. We doubt the practical
effect of this recommendation.
(e) Wage and price restraint is needed, perhaps
by a legal freeze in 1973, with a partial exemption for
wage increases that result in price rises of no more
than 3-1/2 percent per annum. Comment: this recommendation
is controversial and the attitude of the Administration has
been made clear.
(f) DISC does not emphasize additionality enough
and should be replaced by remission of the corporation
income tax -- for example, by a percentage equaling the
percentage increase in the ratio of export sales to
total sales. .This should be done regardless of GATT
restrictions. Comment: this proposal does not recognize
the importance of retaining as well as expanding exports;
the Administration prefers DISC.
(g) We are losing ground in research and development and in training of engineers and technical personnel.
Should the Government give more support to applied
research? Comment: we agree something needs to be done
by business, labor and Government to strengthen our
technological position.
6. The monetary section raises more doubts in our minds,
particularly with respect to publication. Following are some
comments:
(a) We agree that unilateral devaluation would
accomplish little except an increase in the price of gold.
We are not sure that comments on devaluation by a leading
banker would be helpful to confidence in the dollar at
this time. Technically, the speech does not fully bring
out the difficulties and disadvantages of an increase in
the official gold price in terms of inequity for dollar
holders, inflationary potential, revival of gold speculation,
preference for gold over dollars, and windfall gains to


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3

Russia, South Africa and private gold hoarders. We agree
that devaluation is not a satisfactory solution but would
not go so far as Freeman in suggesting that it might
conceivably be useful as a secondary temporary weapon, if
combined with his more fundamental recommendations listed
under 5 above.
(b) Freeman opposes further controls on capital
movements, pointing out that foreign governments in
the future may restrict our opportunity for further
foreign investment. Comment: relaxation of existing
controls should depend upon improvement in the balance
of payments.
(c) Freeman's basic thesis is that we will improve
our current account position over time by holding
inflation to 3-1/2 percent per annum while others have
5 to 6 percent per annum. Even if we do this, correction
will take a long time. If we aren't willing to sacrifice
to achieve this result in terms of higher unemployment,
higher taxes, longer work week, etc., then we will follow
Britain's course and sustain a significant decline in
influence. Comment: we endorse this view.
7. The section of the speech dealing with forbearance
by our creditors during this long period of correction is
the one that troubles us most. There is too much presumption
in this part of the speech that we have been guilty of making
promises to pay foreigners in gold and therefore we must offer
them special advantages so that they will continue to hold
dollars. Publication of this section might stimulate foreign
countries to ask for more concessions from us than we feel are
warranted.
(a) We should remember that foreigners always
had the possibility of appreciating their exchange rates
and did not do so mainly because they wanted to preserve
a strong competitive position against us and other
competitors.
(b) As to "forbearance" in not taking gold, the
larger countries have recognized that doing so would


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_II
precipitate monetary changes that could well decrease
their competitive advantages in terms of exchange
rates. In the case of Germany there is a special reason
for forbearance in the desire to avoid incurring the
budgetary cost to maintain American troops in Germany.
(c) Foreigners have earned a good rate of interest on their dollar holdings, particularly in recent
years.
(d) For these reasons we would not be favorably
disposed toward the Freeman suggestion that the Treasury
purchase $2 to $10 billion of common stock of leading
U. S. corporations which would then be sold to foreign
central banks at 90 percent of the current market price,
to be held by foreign central banks for a period of 10
years but transferable to other central banks and salable to acquire the same amount of other securities.
We do not believe that foreign central banks would find
this proposal attractive, since they wishto hold liquid
assets, but they might be stimulated to suggest some
variations on this theme. We do not believe it is at
all necessary or desirable for the Treasury to subsidize foreign central banks or other foreign investors
by selling good securities to them at a discount. We
would be pleased if this proposal were not given wide
publicity at this time.

GHW:lmb


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14

Attachment

II

May 20, 1971

Summary of and General Comments on
Observations on the Dollar
by Gaylord Freeman, Chairman, The First National Bank of Chicago
(Earlier version of April 21 received from Mr. Peterson;
later version of May 14 sent to Secretary Connally by
Mr. Dwyer, Vice President of The First National Bank of Chicago)

The first half of this paper presents a very interesting,
readable and non-technical analysis of the balance of payments
problem and our embarrassing and humiliating position. As
Mr. Freeman puts it "Our problem is simply that foreigners
have more dollars than we can redeem in gold or goods -- at
present prices. As a consequence they do not put as high a
value on the dollar as they did -- nor do they put as high a
value on the dollar as they put on the number of Deutschemarks,
or yen or Swiss francs for which they could exchange the dollar
at recent rates. Thus they turn their dollars into the central
banks which now have more dollars than they want."
In this section Mr. Freeman cites the following reasons
why we should worry about our balance of payments position:


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(1)

Because, far from getting our house in order,
our position continues to deteriorate,

(2)

We might worry because our domestic interest
rates have come down and this has reduced the
demand for privately held Euro-dollars abroad,

(3)

Foreign central banks resent the inflow of
dollars created by the United States that
thwarts their intended anti-inflationary policies,

(4)

Regarding the present crisis as a German
problem works against our taking the matter
seriously and trying to prevent a further
worsening in our competitive position in
world markets. Mr. Freeman states "The present
crisis is not due to short-term speculative
swings seeking arbitrage. On the contrary, it
IT

2

is an acceleration in the movement away from
the dollar that has been going on for several
years and gaining velocity over the past few
months,"
(5)

Our postponement of attacking the underlying
issue of over-priced U.S. goods may accelerate
the development of a common currency in Europe
and place our corporations abroad under a
handicap of having to borrow a foreign currency
a position that now handicaps British and other
foreign corporations in operating outside their
own countries.

Mr. Freeman concludes that "We avoid the humiliation of
presentation and confessed inability to pay, only through the
forbearance of our creditors -- the foreign central banks.
"
In some of the above comments, Mr. Freeman is perhaps
too defensive. The larger foreign central banks do not wish
to face the consequences of stimulating a run on the U.S. gold
reserves. They fear that in the ensuing confusion, they would
end up with a less favorable competitive position either throug
h
appreciation of their currencies or restrictions on access
to
the U.S. market, etc. The Germans have a special reason for
forbearance as they desire to retain U.S. troops in German
y
without undertaking the budgetary cost of giving us a really
effective offset for these troops.
Even granting this, it is still an awkward and humiliating
position into which we have drifted, as it becomes increa
singly
obvious that gold convertibility of the dollar can be tested
only by small countries in small quantities.
Mr. Freeman finds the cause of the problem in two major
points:


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Federal Reserve Bank of St. Louis

1.

Our past unique advantages of access to raw materials,
a large market, adequate capital and indugirious
people are no longer unique but are shared by other
countries.

2.

We do not fully realize that we are no longer
unique and other countries are playing the game
harder than we are.

.11•••

3

As a comment on this diagnosis, it is not certain that
we ever had in peace time a very strong competitive position
in world markets in manufactured commodities. We did have
a strong position in agricultural commodities and some raw
materials and energy products, before World War II. We
have used up a good deal of our mineral resources, and give
away a great deal of our agricultural produce to poor nations
without much return. We have difficulty increasing our
agricultural exports to countries that can pay us in hard
currencies or dollars, because of protectionist policies abroad.
Mr. Freeman's conclusion is right that we are facing
much more serious competition than in the early postwar years.
Germany, Japan, Italy, France and the U.K. have been resuming
their positions as industrial exporters, and they probably
have better access to the United States market than they had
in the 20's and 30's as a result of our more liberal tariff
policies and the general trend toward multinational corporate
operations.
As in the case of most other discussions of this problem,
the paper becomes less convincing in prescription than in
analysis. Mr. Freeman thinks we have three alternatives:
1.

Reduce public and private foreign expenditures
and commitments,

2.

Cut our costs and prices in dollars, or,

3.

Reduce our costs and prices by depreciation of
the dollar in relation to other currencies.

He rejects the first alternative and regards the third
alternative as a temporary stop-gap measure. He suggests that
we must (a) seek to become more competitive and (b) encourage
our creditors to forbear while we do so.


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1r

4

Following up these points, Mr. Freeman suggests:
A. The first requisite is that the balance of payments
problem must have a high priority among national goals. This
is not the case now.
B. We must discourage other countries from selling
below their cost.
C. We must get our costs and prices in line. (At this
point there is a section discussing the possibility of slowing
down price increases, with emphasis on fiscal policy and heavier
taxes on the employed and the wealthy to ease the inequitable
burden on the unemployed. It is suggested that we might want
to try a legal freeze on wages and prices in 1973).
D.

We should stimulate our technological lead.

E. We should offer a stronger tax incentive than DISC -one which relates the benefits to increases in exports.
F. We may have to depreciate the dollar as a temporary
weapon pending an attack on restrictive labor practices, a
wage and price freeze, etc. (Mr. Freeman suggests that a
unilateral devaluation would mean little more than an increase
in the price of gold and there would need to be a multilateral
readjustment of exchange rates.)
G. He rejects controls of imports on capital movements,
suggesting that we may find it more difficult to invest
abroad in the future as governments become more nationalistic.
H. We must encourage our creditors to forbear during
the long period, perhaps over several Administrations, while
we are trying to improve our position. Here Mr. Freeman
suggests that the United States Treasury might purchase stocks
in U.S. corporations and offer them to foreign central banks
at a discount from the market. They might be made transferable
among central banks for a 10- or 15-year period. Other-alternatives would be to offer some incentives to foreign
investors to purchase American securities and to foreign
corporations to make direct investments in the United States.
But he considers that these suggestions are rather remote
possibilities. Everything really depends on our giving some
effective evidence of our determination to "get our prices
down to competitive levels and thus repatriate dollars in
exchange for our manufactured products."


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,
deorge H. Willis

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Document Type: News service reports
Citations:

Number of Pages Removed: 14

Reuters. "Giscard and Connally Talk On Monetary Situation." May 19,
1971. Reuters. "New York Exchanges: Closing Comment." May 19, 1971.
Belton, Eoin. “Connally/Giscard D’Estaing Meeting.” May 19, 1971.
“The Dollar Crisis: Floating Toward Reform?” Time, May 17, 1971.
“The Dollar Goes Begging.” Newsweek, May 17, 1971.
Wallich, Henry C. “Henry C. Wallich on Exchanges in Turmoil.” 1971.
“Hot Dollars Spark a Global Crisis.” Business Week, May 8, 1971.

Federal Reserve Bank of St. Louis


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https://fraser.stlouisfed.org

1-4 604-vueet:0-74"4:144do

71(-4-4

Excharwe Rate PoltaivithiyinctuatitiziExchstre Rates

Ccmmon flriacinlcs on e7tchanc.,,,! rnte
parities and flucIdeological discussions of the relative merits of fixed
the objective of exchanv_ rate
tuating exchange rates tend to obscure the fact tht
a balance of payments conducive
2olicy is the same under both systems-- to achieve
conditions of monetary stabilityi
to a high level of I:roductioa and em?it-Tment uni.ier
are different with a fluctuating
ive
object
The vnans thrt must be used to achieve this
rirurily because the economic
exchange rate than with a fixed parity, but that i
what is a suitable exchange
mine
datc.r
environment is different. The principles that
regime of f1uctu2Cing exa
to
y
- aritics apply equall
rate under a regime of fixed :.
chese rates.
ry authorities is to
In a system of fixed i-arities, the 2olicy of the moneta
good years and bad,
of
e
averag
en
achieve a balance on aa official reserve basis over
the normal net
to
equal
es is
in which the surlus or deficit on goods and servic
appro-2riate only
is
ts
neyzin
e of
capital outflow or inflow. Uwiously, ouch a balanc
productioaacd
.of
level
too-low
II it is achieved without 1:112osing on the economy a
y to a rising
econom
the
subjecting
emlement in order to avoid a T,ersistent deficit or
;an a.,-,;;rawiLl
Evan
s.
tent surplu
tren] of prices and costs in order to avoid a ‘,;orsis
sr7ius)
(or
t
a tarimrary defici
2riaLe trend balane of paym:ints, a country nay have
y of its
ecoaxl
the
contraction) or
when its own ecoy ia in a cyclical exiansion (or
:h al3e,
ion).
ction (or exans
trnm-lc, nr-4 rvctinr nartners is in a cyclical contra
yents
of a bninnce o.:A7!
terratin7, deficits and suroluses are not anindication
aeiyi:ten
are the =cans by
they
fact,
In
ved.
provided they are nt largo or prolot
afltu
ionary effects of cyclical
of fixed parities limits the inflationary or deflat
tions in aggregate demand in individual countries.
for its currency ti4lat
To tvintain such a balance of payilvants, the ,,arity
ry iund must reflect
nmeta
l
ationa
country fixes after consultation with the Intern
country has such a
a
that
ng
Assumi
its lon-run international economic iosition.
rate policy. By
nge
e:y.cha
-run
rarity for its currency, it does not require a short
ate outside
fluctu
not
may
cy
curren
the rules of the Fund, the exchange rate for its
Ihts, wnen the
.
dollar
U.S.
the
with
I-a-cote of I :2er cent above and below the c,arity
because
arily,
)
‘
'
above
liuit
u:Ter
excliene market is strong and the rate rises to the
in the
ene
interv
dust
ities
author
ry
of the conjuncture at home and al)rocd, the moneta
to
ve
relati
suly
of
the excess
marlict by buying foreign exchanle to the extent of
lover
the
to
falls
rate
and the
demand. Similarly, when the exchange maret is mak
ene by selling foreisn exch7
interv
vitst
ities
author
ry
limit below parity, the =neta
to de,1;and. Under a systeit of fixii
to the extent of C12 deficiency of su:)illy relative
in the balance on goo-ds and cerparities, the ,t.Incinel ilm:2act of a teu7)orary change
an offsetting change in the reserve
vices or in net caAtal movements is to require
position.
:ect
be pavaive with res,
With fixed parities, the monetary authorities cannot
e
reserv
teitt dzficit on an official
to the state of tht balance of 1,aymants. A 7ersis
be.
to
of reserves. If the parity is
basis must in time result in a serious deletion
the deficit. A persistent surhalt
mairtainsd, measures must be taken to limit end
To the extent that it rlects
plus will also have adverse effects on the economy.
ses domestic in.C.00,28 r::
increa
it
an increase in the balance on goods and services,
increase in the net inan
ts
reflec
tive to available supply. To the extent that it
for reserves that
.
assets
capital
flow of capital, it iuvolves a transfer of domestic

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2-

are not needed by the economy. In any case, the surelus on an official reserve basia.
results in an increase in the money sueply and iu bank reserves, end unless offset by
the mnetary authorities, may cause an undesirable monetary exeansion. It in imelicit
in e system ef fixed earities that surplus and deficit countries will take prom et
measures to restore a balanced payaents poeition. These maaeures, hwever., do not
contemelate either subjecting the deficit country to depression or the surplus country
to inflation.
A large and eersistent deficit or yurelus may be the result or changes in the
real internetienal economic eosition of a ceentry-- either a change in the recierocal
demand for cxeorts and imeorta of goods and services or an enduring change in tile level
of foreign inveetment. In general, a chanee in tna real interuatioaal economic posittee.
of a country occurs gradually, eni its effect ea tha 'valance of payments beceee large
only after a few years. There are two ways in Olica a country can ereveat. or offset
the effect of a. gradual change in its real international econamic position. In a surplus country, weges can be allowed to rise seeleeeat mere than erodeetivity and in a
Cbvioualy, such a. eolicy is more
deficit country somewhat lees than productivity
praetical in a surplus country than a deficit country. Alternatively, titer a cumulattve chanee in Cae real internatieeel ecouomic eoeition of a ceuntry, net offset by
the adjusteni of wagea relative to eroductivity, a surplus country C6A raise the
ezrity or a deficit country can lower the parity.
Tee mere Local reasen .or 4 laree aad eersistent surelue or deficit io a
difference in the increase_ of erices and cesta in the deficit and eurelus ceuetries
arieinie frem a deLecetic inflation or an inflaizion abroad. If the relative ieilatien
belerecei ee-eeeete
'eee Lecelee leree, tl:eere :zey !re no accceta:;ic wzy ef 2:eeterire
country or a rise
the
Leficit
the
earity
in
of
exceeL
through
a
reiuction
eoeition
internetieeel eayneats
Even
then,
the
eattera
of
country.
in the earity in the zerelus
country
has an endemic
infletion
is
halted.
lx
a
will. be restored enly if the reletive
adjusted at
is
inflation that it cannot halt, the deficit will recur unless the earity
frequent intervals in order to offset_ the steady rise in erices ad coals. tee:ler Cann
male.e frequent changea in rarity, the monetary auehorities may decide that it is better
to let the exchanze rate deereciate gradually in a free exchaege rurket.
A country may find that steadily rising prices and costs abroel are causing a
perslateat surles in ies bale-nee of eayk,lents and thet this is transmitting theriafiatioa to its wn ecoaeuy. The imeact on the drestic ecouozny veky be eeecciaily imecertent
in a country with a large exeurt-imeort sector, particularly if its ecoaxny is closely
associated with that of the country or countries with a eroloneed inflation. If Inc
inflation abroad is continuing, an ihcrease in eatity can have only a temorary effect
in vinimizing the transmissien of inflation to the domestic economy. A succession of
afreereciatious to neutralize tha foreign inlAation iG imeractical. That is tne rationale
of a' temeerary regime of fluctuating exchanee rates to enable a country to stabiliee
domestic prices and costs even if the inflaLion continues abroad.
The view that a country can insulate itself from inflation abroad through a
fluctuatine exchange rate is misteken. The effects of inflation in other Large trading
and investing countries, particularly one of the economic magnitude of the United SteteA?,
are eo eervesive that the envireurtent of the world ecuuemy is certain to be different
from what it weuld otherwise be-- whether the inflation is caused by excess demand (and
the ieflatiee is cued by risins
CU.:U.
"oy 7:eetrictive
(ee
are
be acid is that a fluctuating exchange rate erovides a couaLry with greater freedoo to


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s and costs. . On the other hand,
follow policies designed to stabilize dozlestic price
y. with a fixed parity, economic policy
it increases the com)lexity uf economic polic
but Lot with the exchange rate. With
must be concerned with the balance oi payments,
must be concerned not only with the bala fluctuating exchange rata, economic policy
It is essential, therefore, to conz,ider
ance of : aymeuLs, but with the exchange raLc.
t in an appre7rizte baLance of paywhat is the exchange rt çoiicy that would resul
.
ments in a regime. of fluctuating exchange rates

Passiviti_on er,chanc,e rates

•••••

of fluctuating cxchair;e rate
The argument has baen wazie by some aivocates
exchcnz:fl
eiicy. at all. Ey T)err,lictin
that there is no need for an exchange rate
e cc -.y
r,2sti
)
_
d
the
tAc oreiga sector on
ran to fluctuate, it is saia, tu ict of
by
ved
achie
presumed to have been
has been neutralized. This neutratizatica is
d without any intervention. With
Ilal3an
cad.
)ply
;
suthe foreign exchane market equte
nts of a country will altay be in balance
such a passive policy, the international rzyme
Uto mean that tIte d=estic econoy
Oil en officl.al reerve basis. 14ilis is then a5W3
iv razans is Latli: L;Ae vaowly
orcin trtlu2acLion5. in
is unaffected by tt
6a1ance of pnyments.
Ly ti
suly aad bank reserves wiii not be afea:z..::d
nue to be effected by thr
conti
will
costs
cad
output and empioyustat and even prices
of Oa balance of paymencs is liely t3
ance of paynants. Purthamore, the effect
1:ciL
-- „olicy under fluctuating
more dilstabilizin3 with a passive Lxchange
than with a fixed parity.
nality iu
arally agreed that in a country with high seaso
It is
mL!rket to av. oid
ge
exhan
tc
wma in
irv!orts, the monatafy auenoricie3 must inLer
Cu.
le
excha
L'ae
iA
our
largo seasonal fluctuations that would otnrwise
"th
r
secto
CiVit
to
oily
fluctuations would be sariousiy disrurtive, not
,,eriod of
seasonally stzong :
the
In
well.
ny
econa
but to ikia rest of Ce
and
Liil
would
ex,orts
of .j.ayelents, tne elccaange rate would ac;preciate,
yiut.
em2lo
and
tput
i ,ricas,
anward pressure on j
Lisa, and there would be do,
rata would (1ange
exchli
of payments, Oa
in the seasonally weak f,eriod of tae balcuce
u.:ward rn
be
would
fall, and there
preciate, ex?orts would rise and im:)orts would
intit
ns
uatio
lizing fluct
on irices, output and employment. In fact, dtabi
in tia next 43...tccion. Mc vz,E2.;ew:1
i>a
will
s
ns,.a
rate can occur for other reaso
a sufficient scale to preveat
seculators would enter the excnange ma..xl-utt on
or this reson,
highly
ing fluctuations in the exchange rata is
very unlikely to be neutral in its iwact
policy wider fluctuating exchange rates is
on the economy.
, the dacision of the mnetary
In a country with fluctunting exchange rate
in the cy.np market will uot only aif
authorities on wAothar or not to intervene
economics Di oth(2r countvies. Tha purpo
the dmaastic econom, but will affect tAe
;chane stsbility, LI12
prozlotion of e:7!,
of the International Nonetary Fund include the
of co,a2etitive
ance
avoid
gements, and the
mnintenenc.e of orderly exchange arran
OimaElrbera wich r:
ation
obliz
ad t4c1
depreciation. T4e res1Jo1sibility o; the l'und
ing parity and ,
exist
an
ons
a country aband
Lo exchange rates is not terwinoted when
r that if a
datr,e
Crpe
is
fluctuate. There
nits the excUange rate for its currency to
rz3L,it Zor
i;e
cxchan.
tAe
manipulate
inrvaa in tu ex6tariz;e 4i.cirket,..;.: will
IT21.1.17.ars of tikl Funi.
dat:rio3nt
kr•:,
nc
ruses, ur
alate
accua
not
if a couaLry does
beea
of exc-rti.i.
rate
&a manipulating the
more than a modest 4mount of reserves, it cannot


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4

(See the discussion of Robert 7:Tiffin in a forthcominz sym2os1um on fixed and flue..3 not touch the real issue, which
tuatirag exchange.; rates.) This is true, i)ut it (1,
is that haAlazard fluctuations in tha rate of a:harAg.s1 may have a scriously adverse
effect on the country's own c;covouy•Lnd oa tncit of other countries.
In a 7aDer written for the International Monetary Fund in january 1951 (EIES-46)
dtnt F1cto2,1:17 1.:Nzhnanzi
rniEsj tivIA quesLion in coric.ludinR a discussita o
"r7 what manns could the Fund under those conditions filuctuatig e;:chanse
nuine international intercut in avoiding the 1.16e of excnane
rate31 rrotect L'ac
- Alr:.o3es?" nile I did it answer this cuestion
natioaal
urely
rets for i:,
c.c did 11(ake wsna im -orLaia; points on t.xcn6e rate i,olicy tnder fluctuating
the ;,a,
change ratas. 'Ewa 1,aragrapha of this pac,cr are wyr'th noting:
torgenerSliy, a country ought to have on 'average' exchanse rate

ich over a p2riod of time of 11Jaited
(whilther fft.. t1 or fluctuating)
will balame ica xT,ecipts aaa raymnts.
cycle)
duration (a.g. a buoiuues
or the Tnriod will involve alterbalance
the
With fixed e7change rtes,
ou:-olus ad dfqicit. With I7 uctuatialz r.rx,:.han;c: vans
rnte
designed to 1)roviee aroxiate balance in tile ftw of xecefpts anl payments, there will be eit1-11T na or, Lnre likely, much clLr urpluGez and
1i 1ur
4ied a c::;i,l,TILry
defici3.
nce
c'cly1,%3 in z.,:orvcs, tara is 11,..)r1lalance of. r.)nyiLenta difi41.744 a ueiiioad cora!:;c; 3i
(tniAn3 the cycie s a Will010) batwean
,eriod
fluctuating rats that yisis the saa riat i-,o3itioa over a :
'A challe in .?.-.1tcharzo, rates (whethr throu)h a caLe in :.arity or
:fads lo
throu2h fluetuation) is Intended to iLr the reticts of ex7ort g,
, .gods in
or zoc.d.s. to h,av.!
in donestic Troduction and of
ho e
dovestic conotiou and investnent. It does Cats by altering the re1atio;Istai2 o:',1 hone prices to iorcif,.,n r.rices cz;c1, iicintlLy, th distrlbution of incoml. Assuming that the exchange rate is suitable to tha
there is lLttlo to be
countryfs bal;ic internatioaal economic ,)osition,
incmle ti.hiS7ts n-rely
end
1ce
1
.;.
iLduci.Lg
by
in
intitrial coutrics
ff,ainzd
in
fluctuations
to
ond
,
corre
that
assure
,oris
to
f1u:2t1wtions ia im:
are
theDisolves
.worts
in
fluctationa
ports, particuLariy 1,Aen the
unwArai-ed.'
This statement contains the general princicde that :Aould guide excange rcte
policy in a country with fluctuating exchange rates. In brief, after tIle initiml
or to the cil. -ae in the coy's
adju3tment to the change in relative price a and cc
ioaicpositic,n, tue ccccj I..21:3 should
real itiLernational
claent around a trend Olich would reT,ult in Lich t1.12; ste baleOC .fay1-1,ants zz.a with
a fixed parity suitable to its basic. intarnatioaal ecoic paaition. Taus, fltunother fluctuzltions that conforN to a suit;!..ble fixed •parity eAould be 7ermitted
tions in the exchange rate should be pre%fented. 11!oreover, it is inc:rent in this
:,1n that mdrcte fluc:tuations in th2 t.alanco o: 2ayncts ri3suiting from cyclie,91
prini,
forces should be permitted, an4 this would require 1,:caventing fluctuations in Lie exchan3e rate that are in re:7;2=8e to an ordinary cyclic-al cxv,ansion or coritrilIction of
the economy at hor-„le or vbroad,
•

id it •is
in rates, it is not,. in conflict with thzit interest oi 'or
Fund.
What
the
of
urposes
th
to
conforms
closely
•exchango rate policy that mst


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-5
considering the various
involve o can beat be scan by
policy
rate
exchane
such an
1:orela ez.chan3e markec
of suly or dc)mand in the
chnnse
iu
rcsult
that
forces
offt.2t. If a chnngQ in su-:)ly
1 rate if
er.chans,
the
in
cnge
consequent
hav to bz through
nn4 a
ti.zIrizet is to b2. offi.let, itwill
exchanp;e
for6J,Ta
th2
in
chansa ka their ho1dor d=and
authorities, riarily ihrwsh a
mfluetary
the
by
intervantion
other monetary
appro?riate circt,!:,Atances through
in
although
reserves,
in3s of
poliies as well.

-,711

1

flutovs in eyr.1.,,,n , raf-eri

forein exhauge
thl sup::,ly of or derlaal for
x1 the vforld
The test whether a change in
econy
on thn dcinestic
have
wouid
it
effcct
the
should be offset is
is cohsw-auL with
rate that ws.uld othrwise em,KIrge
of: payweuts in
iyaluacc!
ecoucomy ar.d whether the exchange
1..11 s2proriam
in
result
would
that
nc
or in conflict with
llrovie,e :or a balanced
Lalance of payments muot not cmly
a
Such
a balal-Ice
ru.a.
long
the
avelrie of yea.rs, but Caoui(1 Uave
an
over
basis
rilaarva
outilcia of ca:Atk.A.
ti on on cn official
010 normiJ not inflow or
cnd s3rvice:1. nvivalent to
exchan4:,3 warket that are chfa
preictable fluctt.:Lations in thL
Apart froca
LIA4viccS, the latzest
Lad iJaDrtill of :;,:r:Yds
dd
ciy
w:ry
cz'wiz:s7d
;.:(L
L4.
Lo
;:c;u1.1Live
crez-Lt3a condlti
parity. Fu.:thernore, 1:54C
6,111Lilb2-e
:m0'4 to
r22,
thrn i0
tim i
a.
for
tha:ixts
in
j=tiZy
oa a Lico,:-tenn
vay tL to
baliva etat
to
n'Ave
if
,
It
z
r,;.
ra
T1 fnll in Lhz
C7 outflNq of
5i)acult1Lion, o7 a nczanthe excheIlPe rate -Jill ba seculative oinion Will ii>2 more h:avily oi. on ride or
spez:ulation on
mre likaly,•the vaicnt of
Zrcim f ,f:.ulation gn a rLle to
occrsit)n
a
o.
ryr'faift
rC.I.ait
on.•7,r, ziii:hch
ca:.net Le cot.;,:o1d Cirs4
of
a
ts
ulove:7;41si:cculative
L.frge-scale
ti/e interest rtes.
illuzrvna to c,--ifsct fi:,eculative
Unless the mnotary nuthoritics
rca ltzt::=,; cPi coatinued in
1:iatc. If CAcre
c7,wha:Le
the
.LIct
ecTitcl, they will
7rcciation of
it wTh reLnit jr.6n c,
orviCes
iL titaiya on go5ds a
ci sct!vaue oi fto currevt4
a-ca coLLf,:ui
a
witt,
:rz;
t21,
f3reiga exc
the abnoruai capitiU
in a dei-,reciation of the
result
on
would
it
Atal,
ca,
1c:Livc
t:;)&tc the dcc:reiled boce
services iilereasd
ciu
ctld
:
11
goo.1
ca
tnIzx.ce
thc
r;z1:, wit%
ti:ia
ce4tal
in dauestic
4:nd
tcc!=uatry
L'ia2C
;-,14Lat:,1;t•oi
tO
to offt tha zJti.lcelative
chstlw:2 in
fluctatins exchange rates snould be
deAtabili
resc,rvcs in crder t3 avoid
usin3
or
accumaatiug
throuilh
c3chsnge rates.
tLe
ft7led parity in order to avoid
is
country that ivn abandoned a
1 .)1.1cy
C,2
cItc:Ige
lu
to
i;-:)olant. guide
m.,o!3t
the
rasbroni,
taare
;,ricas
miz3ion of inflation
relativa to. 1,7')reia. rxi,ces. If
(2-21.chalvA!
fort
cA:
f
c
,
EA,101y
11 ba a ttrncy ;Thr
riset
c:hatIgo. in ,z7;11:, i1
1:;!az
t
4-ate ft-A.
tr
cnzcliaalsg
ioreign
- Lu iacr
appreciatio2 . of the
an
in
itself
be pemitted to nznifezt


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- 6 will increase,
the balance on goods aid ervices
the domestic currency. Otheroise,
This would negate
.
rice
Co
and riccr will tend
aggregate douestic de=a1 will te:zat..d
a chani;e in the
,
Thus
.
exchange rata to auctuate
the very rur?ose of 1,emitting the
ation (Cite
infl
of:
ee
a change in the relative degr
exchan3a rato that corresi:onds to
purpose,
this
For
ing.
:-,c from Gussel) is stabiliz
inflation purity, Co borrow a conce
lactured
manu
of
l
leve
e
2rison is the whole&ale pric
ce in
the a::Troriate rice level for com-4
rtan
impo
r
thei
would be weighted according to
froods. Prices in foreign .:!ountries
thk: export-im2ort trade of a country.
should reflect the inflation parity
The princir,le that the exchange rata
Llic position
ges in the real internatioaal econo
should be qualified to allow for chan
rocal
reci
to an endurin3 increase in the
of a country. Such a change my ba due
or outflw
ow
infl
to an enduring increase in the net
interdet:land for exports end i4)orts or
real
d 1:aritias, such an ivorovement in the
ter
of ca-4tal. Under a systam of fixe
grea
a
in
and very gradual, would be absorLed
vo
national economic position, if small
ilati
the cuuv.
vity. If not absorbed in this way,
ing
tuat
rise in wages reiaLive to producti
a fluc
absorbed by a chane in parity. With
that
,
charges would ultily-atoly have to be
e o price stoility
need to dituri) the basic principl
=change rate, there is
uctivity in the manufacprod
l to the increase of
equa
be
ld
shou
s
wage
in
ease
incr
tha
ts anii ime in the. reciprocal dcaand for exor
for
turing itrics. 5:;::71tead, an il- crzs
431
frei
1
i'zself in a riaa in t;ports should be aiload to waniist
offLe
mg:
ld
shou
ow
in net noral capital infl
the currency. .;1_12.arly, an incree
Inifest
tivity, i-ut should be p.=itted to
;ouc
set by a rigo in v,:i:gas relative to
in exge
chan
ing
iliz
ange rata. This is a stab
Itself in an 1,;;:reciatiou of the exch
change rats.
increase
deal with tzn)orary forces tthich
She mre complex problem is how to
Thus,
rts.
im7>o
for
Cr decrease douestic demangl
s
fc,raign denand for a country's ex;17,orts
ztry'
cc›ur
a
re.oults in zn incrase in derAand for
if there is a boon abroad and that
for
nd
dTin
that results in a deressa in its
ea:orts or there is a recession at home
and the exwill i-.'.crease relative to demand
im..7orte, the su7ply of foreign exchange
1.3- market.
oi:fset by intervention in ti.e 0.4c1
chane rate will czeciate unless it is
o2
n abroad cr a booa at ho, the
en Cae other hand, if there is a recessio
eciate.
damr
to decand and the exchange rata will
r
foreign exchange uill decxesse relative
(ei
1
a
the saLla direction at hoccl. and a::r..)
When the cyclical ..):s are o2erating in
raction), the change in the saiy
a Eeneral e-x?ansion or a general cont
there would be no tendency or
abc't cqual to the change in dem,and and
Change would
te or de7reciate on this account.
the exchange rate eithor to apprecia
and
res7-ens to cyclical forces at hoime
An a-opraciati= or de:;teciation in.
tilL;
L.
.
ices
oarv
and
s
goo(l
;es in tha bllance on
cbroad w7uld ?raven cyclical chanE
to
d
r,:i
ency
curr
the excALiat,e rate ir a
narrow SCrOC I a cyciical chan7:a in
ild
rate
ver, such a chnnge in the ee
stabilizin. In a broader sense, howe
effc
services from h3vii.-3 the sae
prevent tha b,slance on goads and
a
in
have
ly
econom that it would ordinari
the domestic economy and the world
fuction of
with iAuctuating exchange rates, the
of fixed parities. C.;1::vionsly, even
the
on,
reas
y of the economy. 1.4:or this
the ezchana rata is to prote stabilit
ti.v2 to
rlz.;
in tile bupiy c foreivt exciaange
priate policy is to offset •the changes
r. Lez7,
aete
they are of a n.olarate char
ariing irm cyclical forces, orovit.leJ
cnd
y
to the deiic'(Av
ciro;ld clre
4.1
a
widecony:
ti.e
are deStabilizi
b:znia,s and 4epression,a at he
part
in
e or
de-or-essioas Co be offset in whol
therefore, for permitting such booms and
through a, change in the enchangz rate.

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Federal Reserve Bank of St. Louis

the
ta
LI brief, the policy with fluctuating exchanN rates must be to
dcstabilizCo
avoid
and
changes
e4change at in such a way as to ;ormit stabilizing
:to in the exchanp:o rata. The test for this rurpose is ullether a c44;11.,-,e in
ing chau::,,
the exchange rate would bo conducive to the maintenance of an approcriate lonteri
balance of payments-- that is, oua in which on an average of g:Jud years and LI2J. che
b:i1c,Ace on goods and services is equal to taa normal r.,2t inflow or outflow pi ca7ital.
dseruduciva to a balance on od
The basic reason for tai test is that it i
incomes
ad
rice
vices that will promota staiiLy o.E output and c17loyment and o
.. romote stability in the world ctcoin the dor.estic economy. It will also ordinarily ,
nony, except in those cc-entries with l'ersizteut inflation. To achieve such a balance
cds aad serviccs, the tnrIaatary authoritie should ,revent a cculativ it
on
or outfloll of capitai from affez:ting the exchange rale. On the other hand, wmcre
there is a change in relative r;rices and ca.sts, the authoriLics shouLi ?emit an offsettin3 at)recUtion or dereciatioa of tha (eNchange rate. Similarly, where there is
a cilan2io in the real intornatio-nai economic .4)osition ol! tire country, the t2rinz-ttiry
authorities zhould iertfrit an w:fs,lecting a:,,:)rctciation or do;reciatioa of the exchange
rate. *finally, on:Unary cyclical fluctuation& at hotz,:,! and abrond stlould nut ba 1,-,ermitt..:3 to aiffet Ci2eLcazuce rat •

••••

4.•

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,
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AN

L.iryand.Libil olicy with flucturitinc;
Thc! cbctive
1o,vf31.
ritics is Cle saw-- to ertu:,;14 the ec.ono:oy to malntain a hi
as vith fied
of producticrn and em;)loyoont.
exchan,ge rates, as with fixed exchange rates, an a7rorian lonl-run balalicc of 4,°,7cal oiicy
upaLts ib a cntribtiag, factor tD the Inaintanance o.LIN1etnry stcbility.
vay be presunel to Le adjusted to the naintenance of stability uncr ordinary conditic415. The cutx ic changea in the budt !:-ositioa nre of theaseives stabilizing
Liutuatioz:.s. L. a -:,eri-Jd of inflatic:u or deressic;a, obvi3usly
vith wodcrato
is a nclied fc;r ctra positive offsettia3L.tal 2olicy, yrimarily dirc,:ted to
acts much too slowly to ha useful in
coaditions. *fiscal
lexibility cl.:1 mi-letc,ry r?olicy
aad,L
tiiao.aerh
Ca
et.
r
1111tianaginz; the exch.amgz
behavior oY: the
ev,,prcristo
the
a:.dlievizl
for
nztruent
rcriCe
c4aea it th
rete3.
excheall
fluztcating
balaAce of paymilta vit'a
problem 5.5 to avoid &!stzibilLzing Lluctuations. in
Ln:?ortant
the exchange rate that uonld result from a seculativo capital inflow or outflow.
Even with an a7;zopriate fixed priy, it is diificu.11: to prevent n 57..eculctiva inflow
throwth 13w
attzupt to diL,2!ourc, a cnjLal
or cutfIc.w or
ci:ank13 in
greater
require
m47
raLea
rates or a car.itoi out.floa through h1a intoreeL.
LtxA3tic
L.e
on
o
the
vi;lw
o
ia desira'ale iraa tii
m:avictiwy policy Lx
.1:zie very
rates.
az.c4.6n;Le
economy. The ?r%iolau ia (1A211 Lio.ra difficult with fluuatin3
f:lown
caitn1
eLive
luct,.;ate rizy iu
rztze.
fe,:zt that the
occu:.
etd
than
than would occur with an co?ropriate fixed 1;)arity, althou3h not uore
such.
vent
:
if there were doubts about the maintenance of tha establislted parity. To ,
done
seculative ca.)ital mvemaats through chauges in interest rates, if it could be
at all, wild requia sucil very high or yen Los intrest rats as to be di&ru?tive
to tho. dotic copaly.
moot

to intrvine in the-=i;cin.
The aIterrtivs. ib foIf tlo liton,ILary- auth&Itl
4r,-11 thus to prevent
capital
c.);
or
outflow
inflow
market to offsat the aileculativa
large chaag2a in the
involve
ti
at
wcadd
froa affectinz the excitane r&ta.


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Federal Reserve Bank of St. Louis

countries, it cca in part
reserves. Insofar as this has ail adverse cffect on other
through drawinsa url the
swzos,
through
uat by tha eteusion of reserve r;rellt,
of the uecuacquisition
Tha
ways.
I17.4tamationaI Monetary Fund, or throtO othw
reserves of
the
incraase
hov.vcr,
would,
t=etary authorities
lative 1m:is by t
this,
ninimix,e
To
credit.
of
:anaion
the bznking systo_m.and stimulate a domPatic el,
(including
oeratioas
market
open
in
.the InolAetary auth-:)rities would have to enzeza
fir:Lances itzeif through sales
the acquisition o reserves by tn. Ench,Ine ticcount that
the central sank, based oa
with
de2o3its
of Treazury securities) or require secial
depoaits. Uhere the
foreign
either increments ok total deposits or incremnts of
be matched by the
would
narket,
thy
saculative funds v directly into thz malley
baakin3 sycAem.
the
.
on
aff.ect
i.o Account and h2ve no
ZNoh .9_nf,
securities sJid by
incrcaed
the
by
offset
talarz the speculative feuds go to hanks, they would be
is Tv.:gligible,
orrations
turginaL reserve rit'olirem,ants. The monetary cost of such
vauld
AccounL
.1a:age
az ti.te thterest p3id oa t'ae securities soia by. the Zreserves. More would be
g
c4ange
eforaln
the
received
on
ianrozt
az tlie
Cazt
fluctuating rates, althouel
a riak of loss in p,cquiring iereign exchane vith
walls could be found to raininize this ):-1.514.
the citchante rate due to relative i7atLation ar,:ked or
As au appreciation
rzal ilai=national Ccaa0M1 I.:cqiition of s country
to an irit2roveuent ia
tho
notiicrctbronetary clAhoritias to iatorvene
b!.11Lin3, k.hore uy i b
45e in
Taz;
. only
thiz;
to prevet
rcservz
a
us
or
vg. u)d have toc,.ccuIAu1at2 roscrvez
orcdry
isaa
the
thangs in Liaaexce re is wtteu
!pension
.
aa (
situatin.• Thuti, if there ic a recessiou at ha.mr.
L1-=
v
an
7revzac.
to
order
lauthorii;ic;5 wo,uld afLquir;:: reserv3 in
a
home
or
at
expansioa
an
:13
a
ter
exchzuge vaiu o ti e curTz,acy ,f,1 if
ale‘izLfcg
recerve'L; to.
recession abroad, te illonetary authorities,. wc-JtIld illt:crvena by .using
prvent a derecistian at the currcy.
it.
; it recizi7as
The difficulty in o-rating such Fra exchanv rate policy
su.7-.,71y of fozoi,..;ft
the
and distinuishing the diffrent forces Chat cause c change in
iniioe
upeculative
- denand for forei(snethanse. A
icxcli4zge reLative to t!:2
oz1.7n
eN,cilange.
forazn
nay be quickly evident in the suly cif or c1an1
or
Vac:.
in
bCa:izo,ciat2 with changes
b2nt
sTecuivf.) caital
cajt.741
o r.f,co-,:.;a1.1,se such
cLYc.it L;ibl
diaccp-i.tut on t.wn
are ocurritig, unlo.,;f;iyzlre
they
v=hile
tommaure
it is virtually iLv)!1)ks3ib1e
SixliLlrly, :it is 2oncLblc to
pria,arily iu tho. io;:ai of c4zi;a1;es in L'rz!..1
demand for foreisa.exchan
ecterain tue extellt to which a change ta the supply of and
on C.c.;:ectic
-is thwl. to relative inliation, but only after a tir4;-xiliell d4tta
bv.-e to tf,71
would
n:,;:lloitiez
r=tary
fccLa pricc lo,acJ1.5,3aville.
before such iniatOa
tc) irvoaa or not to !. ..ntcrvene in the cy.hange narkot long
ia availa6le to them.
oa
The best praCtical rules for c.nchunge rule policy are (c)
to manifest themselves
run iluctuatioas in the exchange rata, while p=itting treads
and
on gLbalance
the
or
z7.tate
grai:lually, and (b) to in guid,nd ultirtctely by the
that
ia
re
axchause
the
in
fluctuations
services. Tne logic of Ininlynizinz short-run
Laan
mmalleat
0
Lar8a changes are mst likely to be due tf) the
I7firticunatn is tro 11:ely to ba c13.1 to other i.c'2.c
u:A21 tweis,d in
Ul!:43
u%t
1.0z;j. 01Z
loriyte olativ
II: fhst it is'
services
End
;
:):x.
1of the balance oa
forces. Willie the basic objective would be to
international
is nainly influenced by


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Federal Reserve Bank of St. Louis

9

or
naintain the balace on goods and cervices n)proprinte to the norm' net inflau
!,T1
chzugcto
cyclical
outflow of capital, Cats wuld be rind/lied tl permit wderate
rea?mse to ordinary cyclical forces at horin and abroad.
The conclusion is that uith fluctuating exchsnge ratas the manetary e.utilorirant
tica should a1.lty4 buch cUal:,ges ia the exchan;'n rate as zlre stabiliziag and 1-,rc,
olicy is h.:lpful to tAa
r.A crexclame rzit
such chani;es as clredetbir.izLi.
inflation
domestic economy cad helpful to 'OKI econmy of other countries tiac:co. tha
e:i.-chan9
an
Such
rak„os.
exchange
ng
fluctuati
with
is no greater than in ele countiv
ecuntry
A
Fund.
Louetary
nal
Internatio
to
to
rata :iolicy should a1:3o bc= acce-table
on fixed
bd
econam
world
a
in
2rnte
o
still
tut
wita a fluzLeating exca6az;e rata
its
rect..,o.
to
Itsve
will
it
be,
my
that
;acities. At some Li„ however uacortain
a
of.
purioL3
Thobole
d
,
ILT
.
fi
ol)ii,6ation to regtare Laid to naintain a
fluetaing
exchange, rai:e should La t.) avoid VA trwasmission of inflation from al)road.
rate
en:chanse
the
ns
fluctuatio
It tIte monetcry auCaociacs iiafrizsliort-tss_n
perattting troAlj forces to o;lerate, a-.141 if Ciira balaw;e pa 600Asad,:ucvicaa
t4e el,:changa
ia suited to th3 logruu intemational econaoic position a a country,
caa
nrity
,
,7
naw
a
alld
rate will z.lwrtys ba 0 - _?rolc:Lmata1y the.1
:tiva inklatic.n8ry
establid vitimuc ca:factia3 the bal2n2e cr.] ,- -cymantl; whmeveforces e>road hnve been br)ulit under


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Federal Reserve Bank of St. Louis

THE DEPARTMENT OF THE TREASURY

DATE

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TO )2,7)
1.0144

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11, A. voLGKER

Mom 3312


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Ext. 5635

THE DEPARTMENT OF THE TREASURY

DATE
TO

./t4a)t

ztiZed

Room 3312


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Federal Reserve Bank of St. Louis

PAUL A. VOLCKER

Ext. 5635

Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: News releases, article
Citations:

Number of Pages Removed: 8

International Monetary Fund. "Program of Work as Related to Recent Events." May 13, 1971.
International Monetary Fund. "Program of Work With Respect to Exchange Rate Flexibility."
May 13, 1971.
Roosa, Robert V. "Reflections on the Dollar Abroad." May 12, 1971.

Federal Reserve Bank of St. Louis


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Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

ROUTINE
XCT337

UNCLASSIFIED
PACE Z1

ROME :13215

1217222:
171

AOTION EUR-25
jCI-

1

-

TR SY -11

h,N
EA -1 5.

E-15

AID -2

STR -E 3

1 -2,4

iNNo -

I

LAE.-

H-132
-0S

S IL--1

NSC-10
?-1Z3

NSAE- 00
CEA-02

RSC-01

PRS-Z 1
TR SE-CJ
RSR- 01

i

CIEP-71
- 12.

C I AL -EZ

XMB -Z6

OPIC -12

LIS

/205 W
119

R 12162Z MAY 71
FM AMEEASSY ROME,
TO SECSTATE WASHDC• 9475
INFO AMEMBASSY BERN
AMEMBASSY BONN
AMEMBASSY BRUSSELS
USMISSION EC BRUSSELS
AMEMBASSY THE HAGUE
AMEMBASSY LONDON
AMEMBASSY LUXEMBOURG
AMEMBASSY OTTAWA
AMEMBASSY ?ARTS
USMISSION OECD PARIS
AMEMBASSY STOCKHOLM
AMEMBASSY TO
.AMEMBASSY VIENNA
UNCLAS ROME 3015
SUBJECT:

OFFICIAL ITALIAN STATEMENT ON INTERNATIONAL
MONETARY SITUATIO:.

1. UPON HIS RETURN TO ROE YESTERDAY (NAY 11), ITALIAN TREASURY
MINISTER FERRARI AGGRADI REPORTED TO COUNCIL OF MINISTERS
ON RESULTS BRUSSELS MEETINGS OF EC FINANCE AND ECONOMIC
MINISTERS ON INTERNATIONAL MONETARY •SITUATION. AFTER
MEETING, CLARIFYING STATEMENT WAS ISSUED SETTING FORTH
OFFICIAL ITALIAN INTERPRETATION AND POSITION ON RECENT
EXCHANGE MARKET DEVELOPMENTS. INFORMAL TRANSLATION OF
STATEMENT FOLLOWS.

•

UNCLASSIFIED

UNCLASSIFIED
AGE02

ROME 03015

121722Z

L. BEGIN :UOTE. ALL ECONOMIC INDICATORS AVAILABLE CONFIR
THAT THE DEUTSCHMARK IS NOT UNDERVALUED IN TERMS OF THE US
DOLLAR AND CURRENCIES OF OTHER MAJOR INDUSTRIAL COUNTRIES. THE
?RESENT EVOLUTION OF COSTS AND PRICES IN GERMANY SHOW THE
PRESENCE IN THAT COUNTRY OF INFLATIONARY PRESSURES MORE
INTENSIVE THAN THOSE EXISTING IN THE UNITED sTATES. IN
THE COURSE OF 1970, GERNY'S BALANCE OF PAYMENTS SURPLUS
SHOWED A TENDENCY TO DECLINE. AT PRESENT THE ALANCE IS
IN DEFICIT. THEREFORE, CONDITIONS ARE NOT PROPITIOUS FOR
A REVALUATION. IT IS IN THIS SENSE, AND IN ACCORDANCE WITH
OTHER EC GOVERNENIS, THAT THE GERMAN GOVERNENT DECIDED
TO FLOAT THE DEUTSCHMARK.
NEVERTHELESS, GERMANY HAS EXPERIENCED HUGE CAPITAL
iNFLOWS. THESE INFLOWS WERE IN PART THE RESULT OF BORROWINGS
ON THE EURODOLLAR :MAR t
. iT BY GERMAN FIRMS NOT ABLE TO RAISE
FUNDS DOMESTICALLY AND IN PART THE RESULT OF CONVERSION
INTO DEUTSCHMARKS OF FOREIGN EXCHANGE HELD BY THESE SAME
FIRMS. THE RISE IN GERMANY'S OFFICIAL RESERVES RESULTING
FROM THESE TWO PHENOMENA LED TO WIDESPREAD EXPECTATION THAT
GERMAN MONETARY AUTHORITIES WOULD HAVE TO REVALUE THE DEUTSCHMARK. THESE EXPECTATIONS FORCED MULTINATIONAL COMPANIES
THAT USUALLY KEEP LARGE STOCKS OF DOLLARS IN THEIR TREASURIES
TO CONVERT THEM INTO DEUTSCHMARKS. IN ADDITION, THE SPECULATIVE WAVE RECEIVED A BOOST FRO, THOSE UNDERTAKING AN OPEN
POSITION IN MARKS.
4. THE GERMAN AUTHORITIES BELIEVED THAT THE ONLY METHOD
ITH WHICH TO ATTACK THIS EMERGENCY SITUATION WAS TO SUSPEND
TEMPORARILY THE OBLIGATION OF THE IS'ULDESsANK TO BUY AND SELL
DOLLARS WITHIN PRE-DETERMINED PRICES. THE INTENTION OF THE
GERMAN AUTHORITIES WAS TO INTRODUCE IN THE FOREIGN EXCHANGE
MARKET AN UNCERTAINTY FACTOR DESIGNED TO DISCOURAGE ADDITIO- •
iAL INFLOWS OF CAPITAL. IT IS OBVIOUS THAT SUCH A FACTOR
07 UNCERTAINTY WILL HAVE SOME ADVERSE EFFECTS ON FOREIGN TRADE.
5. IN THE FACE OF SUCH A DECISION, THE POSITION OF THE
ITALIAN AUTHORITIES WAS IDENTICAL TO THAT OF FRANCE AND
BELGIUM. OUR COUNTRY Is GOING THROUGH A PERIOD IN WHICH
ALL EFFORTS ARE DIRECTED TOWARD ELIMINATING ALL ELEMENTS
OF UNCERTAINTY WHICH CAN EAERCISE A NEGATIVE INFLUENCE ON
AGGREGATE DEMAND AND, THEREFORE, PROVOKE DAMAGE TO TOTAL

UNCLASSIF IED

UNCLASSIFIED
PAGE E3

NOME

315

1217221

EMPLOYMENT. THIS CONSIDERATION JUSTIFIES OUR DECISION TO
MAINTAIN UNCHANGED THE PARITY OF THE LIRA. IF ITALY HAD
DECIDED TO FLUCTUATE ALONG WITH THE DEUTSCHMARK, IT WOULD
HAVE HAD AUTOMATIC REPERCUSSIONS ON OUR CURRENCY; IT SOULD
HA F PLACE: A LIMIT ON OUR A 7ETO'OM'Y AND WOULD (HAVE FORCED
US) TO FOLLOW ECONOMIC POLICIES WHICH WOULD NOT HAVE BEEN
OPPORTUNE.
6. ITALY CONTINUES TO BELIEVE ' THE ULTIMATE OBJECTIVE OF
THE FORMATION OF A EUROPEAN ECCNENIC AND MONETARY UNION.
'
THE ITALIAN GOVERNMENT WISHES TJ UNDERLINE THE NECESSITY TO
PROCEED TOWARD THE CREATION OF A VAST, INTEGRATED ECONOMIC
AREA, WITH THE CONVICTION THAT THIS IS THE ONLY SOLUTION
WHICH CAN RECONCILE THE EXISTENCE OF CONTINUOUS ECONOMIC
GROWTH WITH GREATER AUTONOMY. END QUOTE.ARTIN


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Federal Reserve Bank of St. Louis

0
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HCT6F9

U . CLAsSIFIED
?AGE -1

STATE

079691

)2
ORIGIN TRSE-Z
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DRAFTED BY: TREAS/OASIA: 0 k MACHOUR
APPROVED BY: E/IiD: ILNE
TREAS: C ERLJLEY AND S Y CROSS

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TO AAEMBASSY BRUSSELS PRIORITY
AMEMBASSY THE HAGUE
AMEMBASSY LONDON
AMEMBASSY BERN
AMEMBASSY TOKYO
AMEMBASSY ROME
AMEMBASSY PARIS
AMEMBASSY BONN
AMEMBASSY OTTAWA
AMEMBASSY STOCKHOLv,
USMISSION EC BRUSSELS
USMISSION OECD PARIS

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U'CLAS STATE 079691
SUBJ: SECRE1ARY CONNALLY' RE.LARS ON INTERNATIONAL
1:10NETARY SITUATION
SECRETARY OF TREASURY
FOLLOWIjG IS TRANSCRIPT
ON INTERNATIONAL MONETARY
,JESTIONS
CO:LALLY'S RESPONSES TO
sRIEFING
MAY 6, 1371:
SITUATION AT WHITE HOUSE PRESS
I CHANGE THE SUBJECT TO THE DOLLAR IN
QUOTE:
EUROPEAN i?'ARKETS? HOW DEEPLY CONCERNED ARE YOU ABOUT THAT?

UNCLASSIFIED

P!''CLETFTED

,
s
,
,TF CO:
di' A1\
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YDOr rIAVL
1...51.;I:n- A -ETA i E ,E
1 _ BASICALLY o,E., To ADD TO THAT.

, Actbif

If

.

N

t

ANY TIME YOU HAVE A CLOSING OF THE CONTRAL BANKS
IN EUROPE, AS WE HAVE HAD THE LAST FEW DAYS, OF COURSE,
WE ARE CONCERNED. WE ARE STUDYIG IT. WE ARE WATCHING
IT EVERY HOUR OF THE DAY. WE REGRET THAT THE CIRCUSTANCES HAVE OCCURRED. WE. THINK :UCH OF IT CERTAINLY
CANNOT SE ATTRIBUTED TO ANY ACTIONS OF THE UNITED STATES
NOR TO EVEN THE WEAKNESS OF THE DOLLAR. I THIrK IT
WOULD DE A - ISTAKE TO ASSUME THAT.
WE HAVE PROBLEMS. WE OBVIOUSLY HAVE PROLLEAS IN
THE BALANCE OF PAYMENTS. OUR SASIC ALANCES HAVE BEEN
OFF APPROXIMATELY DOLE 2- 1/2 TO DOLE 3 BILLION A YEAR FOR SEVERAL
YEARS. THIS CONCERNS OUR FRIENDS AROUND THE WORLD.
GERMANY, HOWEVER, HAS VERY, VERY DIFFICULT PROBLEMS OF
THEIR OWN. THEY ARE TRYING TO FIGHT A HIGH RATE OF
INFLATIO AT HOME AT THE SAME TIME CONDUCT THEIR
AFFAIRS TO WHERE THEY CAN PROTECT THEIR OVERSEAS
MARKETS AND THEIR EXPORTS, AND THIS IS A DIFFICULT
THING TO DO.
SO THIS ALL STARTED WITH A SHORT-TERM OUTFLOW
OF CAPITAL INTO GERMANY BECAUSE, OF THE DISPARITY OF
RATES THAT EXISTS
HERE AND WHAT PREVAILED THERE. sUT
THIS ADMINISTRATION, RIGHTFULLY, WAS NOT WILLING TO IN
ANY SENSE COMPLETELY SACRIFICE THE STAsILITY AND THE
RECOVERY OF OUR OWN ECONOmY IN ORDER TO JUST TRY TO
NARROW THE GAF BETWEEN THE RATES PREVAILING HERE AND
PREVAILING OVER THERE; JUST AS THEY ARE MAKING DECISIONS,
I THINK, THAT TENDS TO SOLVE THEIR PROBLEMS WITHOUT
SOLE REGARD TO OTHER PEOPLE.
I DON'T THINK THERE IS ANY QUESTION BUT WHAT THESE
KIND O r PROBLEMS ARE GOING TO CONTINUE. WE HAVE TRIED
TO ':.11AKE CLEAR TO EVERYONE, AND WILL CONTINUE TO DO SO,
THAT WE ARE GOING TO 'SE AS COOPERATIVE AS WE KNOW HOW
TO BE. WE DON'T LIKE TO SEE SPECULATORS IN THE MARKET

UNCLASSIFIED

UNCLASSIFIED
RAGE ,O3

-

-19691

AS THAT 10 ');HAT IT HAS BEEN IN THE LAST FEW DAYS. THERE
IS NO :LESTION A OUT IT, SPECULATORS WERE IN THE MARKET.
.MR SECRETARY, WOULD YOU 2,E DISTRESSED IF A
:,,U,LER OF EUROPEAN CURRENCIEs WERE TO RISE AGAINST
THE DOLLAR AS HAS BEEN DISCUSSED?
SECRETARY CONNALLY: THAT IS A viATTER FOR THEM TO
DECIDE As 70 WHETHER OR NOT THEY WANT TO REVALUE. WE
ARE GOING TO TRY TO MAKE IT ABUNDANTLY CLEAR IN EVERY
WAY THAT WE CAN THAT WE RECOGNIZE THAT WHAT WE DO HERE HAS
AN IMPACT ON COUNTRIES AROUND THE WORLD. WE ARE GOING
TO TRY TO MAKE IT CLEAR THAT WE ARE GOING TO BE COOPERATIVE AND AS HELPFUL IN EVERY TAY THAT WE POSSI-LY CAN.
THIS INCLUDES ISSUING SPECIAL ISSUES IN .)RP,ER
UP EURO-DOLLARS, IF NECESSARY.


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Federal Reserve Bank of St. Louis

.AKE),IT ABUNDANTLY CLEAR THA: V".E
A

-

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•

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IONAL
SACK FOR A SECO. E TO THE INTERQUOIE:
i4ITIOAL THINS, YO,, :)F.ELET) TO DE SALIN:. A MINUTE AG,
DLA TO APPLY ANY FURTH_
TT THE GOVE.—EINT DOES O
UT THIS
TAIr
EITHER
!
L2 TO THE-ECu...u...Y,
INFLATION.
,OUL
TO
EUROPE
3R
INTERE:T RATE DISPARITY WITH
SECRETARY CONNALLY: )3 'I PUT WORDS IN MY MOUTH.,
I DIDN'T SAY THAI. I SAID TAT THIS NATION WAS CONTINUING
ITS FIGHT AGAINST INFLATION AND WE ARE. MAKING MORE PROGRESS
•TH.. ALOI'T ANY INDUSTRIALIZED COUNTRY IN THE WORLD THAT

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. AND WE ARE GOING TO CONTINUE TO

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I SAID ThAT WE ARE GOING TO HAVE AN EXFANSION; IN
Th-:..1F COUNTRY THAT IS GOING TO, IN
JUDOMET, IAPROVE
OUR EALANCE OF PAYAENTS, OUR TRADE EALES ii'JPARTICULA
WE ARE GOING TO HAVE AN EXPASTON THAT WILL FER.MIT US
REDUCE UNEiPLJYrZENT TO A SIGNIFICANT D7G-E,E THE LATTE:
•CL ARE COIN'S
TO DO IT
PART OF THIS YEAR AND NEXT
LdoTINLE THE UNRELENTING PRES.
AT THE SAE TIME AND THAT
WE ALREADY HAVE'
THE RATE OF INFLATL - IN THIS
- THE
A RATE OF INFLATION THAT IS LESS
COUTRIEC INVOLV
ARE YOu SAYING THAT YOU AND LE
TREASURY AND 30VERNAENT WOULD NOT ADAMANTLY RESIST THE
UPWARD VALUATION OF TEE :iARK AND OTHER EUROPEA
CURRENCIES?
SECRETARY COrNALLY: I AM SAYING THAT A LARGE PART
OF THIS IS NOT OUR DECISION. THIS IS A MATTER FOR OTHF'
SOVEREIGN NATIONS TO DECIDE. WE ARE NOT DICTAT077 OF
THE INTERNATIONAL MONETARY SYSTEli.. WE ARE AYIN
ALL 07
THAT WE THINK THAT IT IS IN THE INTE77. T OF
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THAT THE PARTIES SE MAINTAINED. WE ARE
THAT .,;E: WANT TO COOPERATE AND WE WANT TO HELP IN EVERY
WAY THAT WE CAN TO RELIEVE THE PRESSURE THAT EY.T7T
TNT T TIE WHICH WE KNOW RESULTS LARGELY '77.0i'74 ThL
TEN:LOW OF CAPITAL. WE ARE SAYING Th.
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WILL SE AINTAI
FLA1, TO DO WHATEVER IS
NECESSARY, I THI'
TO TRY TO :UIET THE SITUATION, TO
TRY TO INSURE THE sTAbILITY THAT WE THINK IS SO NECESSARY
IN THE INTERNATIONAL MONETARY FIELD.
. ,
- AN YOU TELL
,

US WHAT THINS NIGHT -E'E NECESSARY?

SECRETARY CONNALLY: NO, LECAUSE I DON'T WANT TO
ANTICIPATE ANOW THAT THINGS ARE IN SUCH A GRAVE CONDITIO
THAT API ACTION IN REaJIRED AT THE MOMENT.
... YOU MENTIONED SOETHIG AEOUT INTERNATIONAL
SECURIT.IEL.. IS THAT WHAT YOU HAD IN MIND?
SECRETARY CONALLY: YES, THAT WAS PRECISELY WHAT
PL
I HAND IN
'E CAN SORROW DIRECTLY OR WE CA
ISSUE SPEC_ _ SECURITIES AND GO FORTH. IT COULD SE A
NU.13ER OF THINGS THAT ARE TRADITIONAL IN THE AOETARY
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DRAFTED 3Y: TREASURY: T.p.rELb
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APPROVED EY: E/IFD:
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116Z NAY
FM SECSTATE
TO ALL DIPLOAATIC AND COL
AiiEABASSY BONN
AAEMBASSY ADDI ABA1,A
AEMBASSY
PMEABASSY NAIROBI
CLAS STATE 030357
SUBJ: SECRETARY CONNAUX05 PRESS STATD:ENT
QUOTE IN RESPONSE TO FURTi-IR INQUIRIES, SECRETARY OF THE
TREASURY, JO'RN '6. CONNALLY, SAID TODAY THAT ThE ADMINISTRATION WAS CONTINUING TO CAREFULLY FOLLOW THE SPECULATIVE EXCHANGE .1ARKET PROBLDI IN EUROPE AND .REAINS PREPARED TO COOPE'RATE FULLY WITH OTHERS TO ASSIST IN STABILIZING THE SITUATION.
THE SECRETARY EPHASIZED THE UNITED STATES COTEPLATES NC
CHANGE IN ITS OWN GOLD AND FOREIGN EXCHANGE ?OLICIES.
SECRETARY CONNALLY AGAIN EXPRESSED THE VIEW OF THE UNITED
STATES THAT MAINTENANCE OF CURRENT ,zARITIES COULD PROVIDE
A BASIS FOR REOPENING THE ,:lARKETS IN VARIOUS EUROPEAN CENTERS.
THE TREASURY IS PREPARED TO ASSIST THOSE FEW CENTRAL BANKS

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Federal Reserve Bank of St. Louis

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