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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. They further agree to request permission of the Princeton University Library (and pay any fees, if applicable) if they plan to publish, broadcast, or otherwise disseminate this material. This includes all forms of electronic distribution. Copyright The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted material. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or other reproduction is not to be "used for any purpose other than private study, scholarship or research." If a user makes a request for, or later uses, a photocopy or other reproduction for purposes not permitted as fair use under the copyright law of the United States, that user may be liable for copyright infringement. Policy on Digitized Collections Digitized collections are made accessible for research purposes. Princeton University has indicated what it knows about the copyrights and rights of privacy, publicity or trademark in its finding aids. However, due to the nature of archival collections, it is not always possible to identify this information. Princeton University is eager to hear from any rights owners, so that it may provide accurate information. When a rights issue needs to be addressed, upon request Princeton University will remove the material from public view while it reviews the claim. Inquiries about this material can be directed to: Seeley G. Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) mudd@princeton.edu https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org 7nmhia Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis \kik • Date 11/5/71 From the desk of Charls E. Walker The Honorable Bill Safire To: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • •?, 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ••• -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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis , https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ••• 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 ' https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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, https://fraser.stlouisfed.org 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: 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis $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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis % 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 5010-108 Federal Reserve Bank of St. Louis Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan • • BEE 20x20 TO INCH 96(Actual GNP/Potential) 1.050 SNORE. 11=11 . IUR CHART I ormegrairm ar.12.,MirararAirdi UUMUffil •91FRUPUNIVERIEMEr flib 111 . •••A• • LeNarn PI " •NO•• • InglinhaVtLa..n"• Li, 11••••1118•11111•11•11161 q_sal -111 W t1-4-T 0•MB" 71 MOO 11•111•11•0111 • 1.00 + •1.111. 1111 .95 -t , •-•14 , -• VT:44 T .90 : UdraM .... •••11. •Iallall• t NO lib& :cur BEHUBSEP ummiume"iliffn Ermu.st.un=rtrdM ' • •: i ....t initush IUHITALIFIL 4-2,4,4 ,41 a. lailEsem. "••11% . " 1"1 LUU .51U 6. 44:17- '.. 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'... , ... . i , 66 -• 67 .1 68 , . . • • . • 69 ... . 70 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: https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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; https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 ' 4.4 / • .-4.-tts 171_4. • tZt,i,L), • 117/ 1_t - , NP ) cIf 97 t1( 1087.3 1)13.9., - ,1oO2ofto.s 1051.1 TV17 ow,0 1133,7 • A ( 11-44%, s-3 US. Co 711!1•7 7241 ,7 11 77,y, t 753.1 t.LAAAI. N7.7 37 us a tq 1-> ..tigt.12tvv L . • ,) 1,0 ) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -=:•100 6(4 t` • .6! .1 i141 ,1 141.3 (,73.) 7.11/. 3 : c2 , i rP+.6 IV'z.4 4C.- i4.7 IL17.1 1.:,O.7 W, , tL 14_1L 7 -1 /8.o I(D cat• 5- I ivi.1 .1 S. 4,0 C.70 142.'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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ( ,Peit'Ve. 7lie-akt Roo rtv's ,c,pGftr,44 lU i‘ you wYc ita e kr9vIc/Kil lu yffi/. -r °Ur., /111 -C11 .a WI 5 Ile cti ‘,?;,:kceoziv am The „,e/aLT:e..' ellov frei-&/11>, J” .1"r1 is'!"t",; -2.;;'•, • ',•"`" / •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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis eh,/ , 00ire ,41 6,7 pf-/Aiii )4, /Yek cel -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, . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ' frd wyld /kr -),%- t.,,lotie7 r7,44/.k. f ei p"4. "c' 76 O('.Cj .y1 e 471.a,te 7 0 7%/11 a"' ce;4'1.--,•11.;', :ekr at,:7rAr7 , R40,/e . aPi • A17; , ..4r;+ 1 4*pi-d4,, -;ikfriff 40,-?%fr,:yre, „ 77. 0 4.yoty, .Zrete.r r.> Pket . Mort— i -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 https://fraser.stlouisfed.org 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/, ; ; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 140 ;A• 4717_ 'jot i1LK_ , ,t. , 7 ,4, 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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 % https://fraser.stlouisfed.org 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 (---Ltc;_,( z --i__,-.,L...4„,L.ce.) .----xj(11 __...,_.Z d- --&-y -C•t, ..xi\L.,_ A- rCV2-C•1- IL C , I ' 73 ti'' : : • 6-K4:d- r..--h-t ) i-Ck-A..QC di ..-C__ti . i 'SC‘ 6-1- C.-- / 7 ... .. - -:-?...--Ci. 1,,,.._ •? ----1— , -- ,--.0 t.t -t ._. l•-•••/ _42_7:::::,.c.-7. • _____ ---6- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ', -71=e_ zi, t,,' -I__e.t=1-4_J- 7-1,-ei.i ... .._, ( C L.!.€ CeL . 'LC--‘4-( ,. _ v .---c--1,_ -_ :,__.„,j .__,,,_ :tr::.x.._ /4_c.,.._ .,._/,z_i.3- Lc,• a,::4-______,.._c_, e-t,_ 7,2_4_ t,k_. ,,i_v_: .----, . --,_,,_,,- €., ei_i,....x.-, • --47---E-t ::,-4.: /DO_ Ltz--__(. _k_..(.(7.; V,, ....- :_._ .--i-L,c •I --A----,-Lc- .7,t-'"P 14;•./ ' / 1 4 --/-4,(.41,---- --- -<.-----eL..- / • field, ---c - ..t.t- -t-----C1 :Te c/ -fZ_ .L, :....7 . t7 L --- - e ,--f--,..c _„,, -z'_- 44/41 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '`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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis _ (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: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis UNCLASSIFIED https://fraser.stlouisfed.org 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- https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org 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." https://fraser.stlouisfed.org • 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 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 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org ( https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis c_ 1X https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org 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: 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org (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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 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: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis _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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (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: https://fraser.stlouisfed.org 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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." https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis , deorge H. Willis 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 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 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. https://fraser.stlouisfed.org 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.• -A. 0 - • I• * • , ...IN 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. https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THE DEPARTMENT OF THE TREASURY DATE )4/ TO )2,7) 1.0144 - /OC(111---ts1-1-45-e4± 64//dtek ierlit, AAS CtA/kbe- Ae-1- -13/, / it/ / v e •• / .41 f.,• 1xlerte Z 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0 1 1 HCT6F9 U . CLAsSIFIED ?AGE -1 STATE 079691 )2 ORIGIN TRSE-Z EA -15 EUR-2S IN70 CIE,"-' TRSY-11 SS-20 SAL-02 STR-08 AID-23 E-15 CIAE-00 INR- !'JSAE-, X-06 OPIC-12, 2RS-:s1 USIA -12 CEA-02 /193 R NSC-1,L. COM-08 FP9-02 SIL-:1 LA3-06 RSC- P-03 * 66638 DRAFTED BY: TREAS/OASIA: 0 k MACHOUR APPROVED BY: E/IiD: ILNE TREAS: C ERLJLEY AND S Y CROSS rn irl , CD 7t ,.., c'387650 -- •-- .1::•,'1 1 3• , iiji135Z ciAY FM SECSTATE .staaa.G_ 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 i 1r c) 1 .....“, —10 a) N ......0 n= # a-4 -- 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\ RY CO!'!ALLY: 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. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .AKE),IT ABUNDANTLY CLEAR THA: V".E A - 1 rr, ft cl: -4 46 = cr) • • 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 UNCLASSIFIED UNCLASSIFIED ( -TATE -3T, A Y1 . Z79691. . AND WE ARE GOING TO CONTINUE TO Ci 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 ,2VE4LE 7 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. E A77 C'OT: T(2, CYlvTT"' ' - TC5 S T: iloILG TO A , ' c7 1. TO TAL. Ai C*T. . . IT Ti CI L CLASEIFI-D 'AGE STATE 579691 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 FT7 ' . UNSUOTE https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis T M f7i :21\CLA'SSIFIE: • PAGE Z3Z357 STATE 19 ; ORIGIN ThSE-4, INFO OCT-„A TRSY-11 asc-„A I0-1G L-lf AF -12 CIEP—L1 CEA--. SS 2 -• INR-08 CO.;3 AI -.3 NSAE-00 SC EUR-LO LA-15 AT.A-1L SIL-01 LA3-6 SAL-02 - 1 . US I A 12 L /L52 R 66611 DRAFTED 3Y: TREASURY: T.p.rELb MILNE APPROVED EY: E/IFD: _73:S22 R 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 LNCLASSI:IE7 _ ' , • T. 7.,LA:ShI' A https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 • - • - -r