View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

2 4 JUN 1969

THE SECRETARY OF THE TREASURY
WASHINGTON

eeWTIDEMTJAL - LIMDIS

June 23, 1969

MEMORANDUM FOR THE PRESIDENT
I
am transmitting herewith a memorandum (Annex I)
prepared by an interagency group under the chairmanship
of Under Secretary Volcker, setting forth your basic options
in international monetary affairs. The complexity of the
issue will require some extended discussion. It may be
useful to highlight a few points on which early guidance
will be particularly useful.
The document suggests three major alternatives, which
are discussed in paragraphs 25 to 50, and summarized in
Attachment A.
The principal question for decision arising here is
whether we should conclusively rule out any option at
this stage.
Assuming that for the present Option I (a series of
multilateral negotiations pointing toward a fundamental,
but evolutionary change in the existing system) is to be
pursued, these negotiating issues either will or may be
faced in days or weeks:
The SDR question: negotiations are beginning
on June 27, and we should reach a decision on
the amounts that we should propose to be acti­
vated for the first five-year period.
The question of adjustment of exchange rates may
be precipitated at any time by a French move;
* we need guidance on the extent to which we might
bring political pressure on one party or another
to achieve the desired result.

i/

A speculative crisis may at any time require
additional credit support for the pound, to
prevent a further depreciation; Europeans are very
reluctant to go further, and additional extension
of Federal Reserve short-term credit may ultimately
require Congressional funding. What is our attitude?

declassified
E.G. 12S58, Sect. 3.6
pu - f f W I ___ NARA, Date.

CONFIDENTIAL

LIMDIS

2
What should o\ir public posture be on proposals for
limited exchange rate flexibility and how is it to be timed
and handled?
These issues are discussed in paragraphs 51 to 65 of
the attached memorandum.
Also, paragraphs 62 to 65 allude to the fact that payments
of gold to the IMF in 1969-71, partly in connection with quota
increases, and "nibbling" gold sales to central banks could
possibly reduce our gold reserves as low as $8 billion.
It
is important for negotiating purposes to know whether this
prospect is acceptable.
While I hope you will be able to read the memorandum to
get the full flavor, I thought it would be useful if we
started the meeting on Thursday by having Under Secretary
Volcker review the main points orally, with the assistance
of some charts, before proceeding with the general discussion.
I know you are aware of the sensitivity of some of the
material included here, and we have safeguarded copies
accordingly.
Subject to your approval, I believe that the
attendance should be kept very limited. The following are
now expected to attend:
The Secretary of State
Federal Reserve Chairman Martin
Dr. Arthur Burns
Dr. Henry Kissinger
D r . Paul McCracken
Budget Director Mayo

Attachments - 2




June

23, 1969

CONPf-BBNTIAL - LIMDIS
ATTACHMENT

A

SUMMARY OF BASIC OPTIONS
[Paragraph notations refer to
the basic document (ANNEX I)]
I. Paragraphs 30 to 32. A series of multilateral
negotiations pointing toward a fundamental, but evolutionary,
change in the existing system. This would include:
(a)

Early activation of Special Drawing Rights in
a substantial amount. The U.S. asking figure
would be $4 to $4-1/2 billion, as against a
possible European starting point of around
$2 billion a year, for 5 years.

(b)

Realignment of exchange rates, with emphasis
on a substantial appreciation of the Deutschemark
(and other strong currencies if possible). We
would acquiesce in a moderate French depreciation,
which may be inevitableland perhaps imminent.

(c)

After SDR activation, an active and sympathetic
exploration of various forms of limited exchange
rate flexibility designed for the longer term.

(d)

Negotiations to expand IMF quotas in 1970.

(e)

At some stage, possible exploration of the
feasibility and desirability of "reserve settlement
account" proposals designed to consolidate dollar
balances and gold in a common reserve pool.

(f)

Continued and strong efforts to remove structural
impediments to our trade and to achieve better
offset arrangements on military expenditures.

This approach, if successful, should restore considerable
flexibility for U.S. policies and preserve a united world
monetary structure. The main disadvantage is that the cautious
pace of multilateral agreement may fail to move rapidly enough
to achieve the objective and relieve the present strain.
II. Paragraphs 33 to 39. Suspension of the present gold
convertibility at the request of foreigners. This might be forced
upon us by reserve losses, or considered necessary because of
.JLnsufficient results under Option I. It could take various forms




C O N P - CRM3U A L
T

LIMDIS

CQNFIBE&T-I -AL r- LIMDIS
ATTACHMENT

A

Page 2

ranging from continuing some convertibility on a negotiated
basis, using gold, IMF drawings or other assets, to an entirely
passive role that would make all foreign dollar holdings
inconvertible.
If successful, this move to a "dollar standard"
would reduce gold losses, stimulate favorable currency realign­
ment, and retrieve flexibility in financing U.S. deficits and
influencing the international monetary system. Disadvantages
would be. the possible acceleration of divisive tendencies
leading towards a dollar bloc and a European gold bloc, a
general European reaction against financial cooperation, the
possibility of foreign controls to limit dollar receipts from
U.S. investment, and undesirable special exchange arrangements.
/

III.
Paragraphs 40 to 50. A small or large increase in
the official gold price. This would require formal Congressional
approval, against probable strong resistance from important
Congressional quarters in both parties..
The purpose of a
exchange realignment,
serious international
run on our gold stock

small change would be to facilitate limited
but this would be achieved only with
political problems and at the risk of a
in anticipation of further changes.

A massive increase would. be_ designed to strengthen our
reserve position and flood the world with liquidity, thus
potentially "buying time" for financing future deficits. On
the other hand, such a change would add to the current world­
wide inflationary potential and present extremely serious
problems of equity for Japan, Canada and other dollar-holding
countries. Progress toward the more basic monetary'reforms
under Option I would be shelved indefinitely, and any added
financing flexibility could be short-lived. For these reasons,
this option had no support in the "Volcker Group."




-COHFTDENTIMK- LIMDIS

CONFIDENTIAL r LIMDIS

TREASURY DEPARTMENT

June 23, 1969
TO:

Secretary of State Rogers
Director of the Budget Mayo
Chairman McCracken
Chairman Martin
Dr. Arthur Burns
Dr. Kissinger

Secretary Kennedy has requested that the existence and
contents of the attached memorandum on "Basic Options in
International Monetary Affairs1 be limited to recipients of
1
this memorandum, in view of the sensitivity of this subject.
Accordingly, it is requested that all earlier drafts of
this paper should be destroyed or returned to Under Secretary
Volcker, Room 3312, Main Treasury Building.

CC:




Mr. Houthakker, Council of Economic Advisors
Governor Daane, Federal Reserve Board
Mr. Thomas 0. Enders, Deputy Assistant
Secretary of State for Monetary Affairs
Mr. C. Fred Bergsten, National Security Council

GONF IBENTIAIy - LIMDIS
-

Keproaucea at tne National arcmves

ANN.&A

■CONFIDENTIAL - LIMDIS

jl

June 23, 1969

BASIC OPTIONS IN INTERNATIONAL MONETARY AFFAIRS

Introduction
1.

Basic policy decisions in the international monetary

area are urgent for the following reasons:




(1)

The international monetary system itself
is under strain, with a consequent threat
to world economic development and the
progressive reduction of restrictions on
flows of trade and investment.

(2)

U.S. policy in this area will have an
important bearing on the United States
balance of payments problem, including our
ability both to achieve and maintain
equilibrium and to finance deficits as
they appear, consistent with essential
domestic economic or foreign policy goals.

(3)

These decisions are related, more
peripherally but significantly, to the
nature of the basic political alignments
within the Western World, including
incentives to create regional blocs.

X-4169 -

COHFIDENJJIAL - LIMDIS

Reproduced at tne National Arcmves

CONFIDENTIAL - LIMDIS

- 2 2.

While changes in monetary and financial arrangements

should, over time, provide an environment in which our balance
of payments problem can be more readily solved, they cannot be
expected in and of themselves to provide a near term answer to
our present difficulties.

Indeed, the chances of full success

for any of the options presented in this paper are closely
related to the effectiveness of our shorter-run policies for
dealing with the serious current payments problem.

Specifically,

we do not contemplate that the courses of action proposed in
the monetary area will permit early abolition of restrictions
on foreign investment and other elements in the balance of
payments, even though elimination of these controls is a
fundamental objective of the choices discussed.
3.

A review of balance of payments programs will

be a logical complement to the choices made in the
monetary area.

Moreover, it must be emphasized that two

other factors will have a fundamental bearing on our ability
to negotiate orderly changes in the financial system and the
effectiveness of those changes, namely, the success of our
efforts to contain domestic inflation and to de-6scalate the
Vietnam conflict.




rONFTnKTTTTjVf, - LIMDIS

Keproaucea at tne National Arcmves

CONFIDENTIAL - LIMDIS
- 3 -

Characteristics of the Present System
4.

The present international monetary system (variously

termed the gold-dollar system or the Bretton Woods system)
has the following major elements:




(a)

Fixed Exchange Rates Among Leading Countries,

Parity adjustments have been made only in response
to continuing large payments imbalances, usually after
controls have been resorted to for an extended period.
Because of economic and political ’
'shock" effects,
the decisions have been typically forced by a crisis and
depleted reserves.

Although adjustments can in principle

be made in both directions, these pressures have tended
to bias the system toward depreciation rather than
appreciation.
(b)

Extensive official facilities for providing

short- or medium-term credits to meet speculative
attacks and to gain time for balance of payments
adjustments by means other than exchange rate changes.
These facilities run the gamut from the formalized
procedures of the International Monetary Fund to ad hoc
bilateral borrowing arrangements.

While they cannot be

r-fhNFTPFftlTTflTi - LIMDIS

Reproduced at the National Archives

"COU'FIDKNTTMs ~ LIMDIS
- 4 -

quantified in total, IMF quotas of more than $21 billion
and U.S. bilateral swap lines of over $10 billion are
major components.

These facilities economize on the

use of reserves for financing balance of payments
deficits but are not a full substitute for "cash" reserves.
(c)

A presumption that adjustments of imbalances

in national payments will be made over time by restraining
inflationary pressures in deficit countries and by
encouraging expansion of incomes in surplus countries.
Fiscal and monetary policies favoring adjustment do not
always coincide with domestic economic circumstances and
objectives, and in such cases there is likely to be a
tendency to apply selective policies, including stimulus
to capital outflow in surplus countries or restraint on
capital exports in deficit countries.
(d)

A pivotal role for the U.S. dollar as the lead­

ing "reserve" and “vehicle” currency.

Convertibility of

the dollar into gold is maintained for foreign monetary
authorities at the fixed $35 price, but convertibility
is now circumscribed de facto by common recognition
that attempts at large scale conversion would be
frustrated by a lack of adequate gold in U.S. reserves
(now about $11.2 billion of which about $1 billion is
required to cover commitments to the International
Monetary Fund).




CeNPIDElfflE&L. - LIMDIS

Reproduced at the National Archives

-GO&FIDENTlAL - LIMDIS
- 5 -

Other countries state and defend their exchange rates
in terras of dollars; and to widely varying degrees, hold
dollars in their reserves.

Foreign official short- and

medium-term dollar holdings ($16.1 billion) and foreign
private dollar holdings ($23.4 billion at the end of
1968) are serviced by a complex and highly developed
set of banking, investment, and trading facilities
both in the U.S. and Europe.
(e)

A substantial, but diminishing role for gold

in national reserves.

Monetary gold stocks in national

reserves of about $38.9 billion (the U.S. still has more
than one-fourth) were about 51 percent of total inter­
national reserves at the end of 196 8, as against 6 3 percent
in 1960.

Barring a price rise, there is little chance

that the gold component can increase appreciably either
absolutely or relatively. At present, reserve growth
is thus dependent either on U.S. deficit financing or
the creation of "reserve credits" through crisis
financing -- neither of which is generally regarded as
a satisfactory base for long-run reserve growth of the
required proportions.




C O N F I D E N T1- i - LIMD I S
M

Reproduced at tne National Arcmves

CQKTIDDNTIftE - LIMDIS
- 6 -

5.

Viewed broadly, this system has supported a rapid and

steady growth in international trade and investment, and has
been consistent with unparalleled world prosperity.

By past

standards, substantial freedom in trade and payments has been
achieved and sustained, although one of the implications of
current strains is to place that achievement in jeopardy.

The

inhibition on changes in exchange rates has helped avoid spreading
depreciations such as were characteristic of the 1930's.

The

"discipline" in the system has probably tended to moderate
inflationary pressures in deficit countries, although fixed
rates may also have contributed to inflation in surplus
countries.
6.

Viewed more narrowly, and from the standpoint of U.S.

interests, the present system has permitted financing some 70 percent
of our cumulative balance of payments deficits (on the liquidity
basis) of $24 billion over the past decade with increased foreign
official and private liquid dollar holdings -- the amount of
$17 billion in ten years is substantially larger than our entire
remaining gold stock.

Gold losses, while large in absolute

size at $10 billion, were called upon to finance only about
40% of the deficit.

During 1960-68, the rise in liquid and

non-liquid official dollar holdings was $8.0 billion, and
financed 58 percent of the cumulative official settlements
deficits.




Pm.FTnrH T y M

. LIMDIS

Reproduced at the National Arcnives

-€QNFIDENTTflL - LIMDIS
- 7 -

The available financing for our deficits has permitted the
United States to carry out heavy overseas military expenditures
and to undertake other foreign commitments, and to retain
substantial flexibility in domestic economic policy.

Politically,

the system has been consistent with, and encouraged, a fully
multilateral trading and payments order.

It has facilitated

a role for U.S. leadership and influence more or less commen­
surate with our relative size and economic power, but at the
cost of substantial borrowing at short term in the form of
liquid dollar liabilities.
7.

In more recent years, growing difficulties and strains

have appeared that clearly threaten these achievements.
Pressures toward restrictionism, particularly on capital
movements, have emerged in the U.S. and elsewhere.

Repeated

speculative crises involving several major currencies and
the gold market, while coped with successfully, have left
a residue of growing uncertainty.

Balance of payments

disequilibria of major countries have persisted for years.
These tendencies have led to a maldistribution of reserves
and have heavily taxed official credit facilities.




CONFIDENTIAL - LIMDIS

There

Keproaucea at tne National

_GONPf©E^TXM3—

LIMDIS

8

is a risk of a breakdown in the basic minimum of confidence
in currencies and monetary arrangements necessary for a
smoothly operating financial system.

This could

in

an important way our capacity to make foreign commitments
and to exeri i*.tcrnawional leadership in international
economic e f d fine
tiU
JA

Underlying Issues
8.

We are poised at a rather critical juncture in the

evolution of the international monetary system.

It is

questionable whether the present monetary system has the capacity
to provide financing for continuing large United States deficits.
At the same time, the attenuation of confidence in the dollar
and in our ability or intention to control our deficits actively
encourages our trading partners to seek additional means of
limiting our ability to finance deficits, which they regard as
a transmission belt for passing our inflation on to others
and as threatening a monetary system under which they have
so long prospered.

The uneasy feeling abroad that United States

deficits are in danger of becoming uncontrolled erodes our
bargaining position, not only with respect to improvements in
the international monetary system, but in other aspects of
our international economic and political objectives.




CONFIDENTIAL » LIMDIS
-

One way

Keproduced at tne National Arcmves

CONFIDENTIAL - LIMDIS
- 9 -

of viewing the current controversy over monetary arrangements
is to recognize it as a struggle over who should assume the
main burden for eliminating or adjusting to the excessive U.S.
deficits, and the form the adjustment should take.

The outcome

will have implications for the constraints that may be applied to
our own foreign and domestic policies; as compared to the sub­
stantial degree of freedom that we have enjoyed during most of
the postwar period.
9.

The growing strain on present international monetary

arrangements can also be viewed in large part as a reflection
of inadeguate national economic policies.

The strong inflationary

pressure in the United States over the past four years, which has
been a major factor in the elimination of our formerly strong
trade surplus and in undermining confidence in the dollar, is
a leading case in point.

Among other deficit countries, the

internal strains and labor difficulties of the United Kingdom
have been notable.

Among surplus countries, Italy has failed

to push internal expansion, Japan remains highly protectionistic,
and the cumulative German trade surplus can be traced in part
to an earlier recession.
10.

National economic policies have been inadeguate to

eliminate the strains of persistent deficits and surpluses
partly because internal objectives differ among countries.
In Germany, for example, all elements of the community




.royffTPKNTTATV - LIMDIS

Keproauceu ai me iMduuiidi a iw uvea

.XONFIDBMTIA L -- LIMDIS

- 10 place an extremely high priority on resisting inflation and
holding the upward trend of prices within limits that are
markedly lower than most other industrial countries, because
of their traumatic experience with hyper-inflation in the
past.

A decision as to monetary arrangements (including

especially the degree of exchange rate flexibility desired)
rests partly on whether these differences among objectives
are thought to be desirable, or whether we encourage greater
consistency among objectives in a framework of fixed exchange
rates.
11.

There is another conflict in economic objectives

that lies beneath the present difficulties of the international
monetary system.

The world wants to take full advantage of the

gains in productivity and welfare inherent in the free movement
of goods, investment, and people internationally.

At the

same time, the sovereign claims of the nation-state to control
its own economic destiny continue to be pressed strongly.

The

basic dilemma between international economic integration and
national self-determination has been sharpened and aggravated
by the rapid growth of the international corporation, which
is on the one hand a powerful vehicle for encouraging
productivity and rationalizing worldwide production patterns,




n W Tn T lTT T Tn T .

T .T in T -

Reproduced at the National Arcnives

-60NFIDENTIAE - LIMDIS

- 11 while on the other hand contributing to speculative flows and
undermining purely national objectives.

Any monetary arrange­

ments must seek a viable compromise between these basic
objectives, but they cannot be fully reconciled.
12.

It is also clear that there are inadequacies and
I
internal dilemmas within the monetary system itself that can
and should be corrected.
(a)
reserves.

These include:

The absence of adequate provision for growth in
In a context of growing trade and economic

activity, most countries desire to build up reserves
over time by aiming for balance of payments surpluses.
In practice, this process tends to perpetuate U.S. deficits.
Our deficits, in turn, attentuate our ability to maintain
convertibility, with the associated risk of a loss of
confidence in the stability of the key currency in the
system.
(b)

The absence of balanced incentives or mechanisms

to promote effective balance of payments adjustments.

Sur­

plus countries can pile up reserves for long periods with­
out revaluation or other adjustment; deficit countries
(apart from the U.S.) are eventually forced to devalue,
tending to bias the system in favor of devaluations against
the dollar, further damaging our competitive position.




CONFIDENTIAL. - LIMDIS
.

Reproduced at the National Archives

^-CONFIDENTIAL—

LIMDIS

- 12 (c)

In many situations, potential rewards for de­

stabilizing speculation are high, without commensurate
risk of loss.
Basic Objectives
13.

As a starting point it must be recognized that no

international monetary arrangement can permit the United States
(or any country) to escape "external" constraints entirely or
indefinitely.

A tendency to spend or invest more abroad than

other countries want to invest or spend (or leave on deposit) in
the U.S. will, sooner or later, need to be corrected.

The

differences among alternative monetary practices lie in
the speed and nature of the adjustments required, including
the extent to which adjustments are achieved through the price
mechanism (including changes in the exchange rate), through
changes in domestic inflation or employment, or through controls.
14.

Against this background, our planning for further

evolution in the international monetary system involves a
balancing of priorities among the following economic and
political considerations:
(a)

Retention of substantial flexibility for the

U.S. both in terms of domestic economic policy and
foreign spending (including military and aid outlays).
This implies, for example, some satisfactory way of
financing even large cyclical and temporary U.S. deficits
on the official settlements basis.




'‘
"ffNFTPFNTTAT, i LIMDIS

CONFIDENTIAL - LIMDIS
- 13 ----

(b)

Encouragement of a free flow of goods, services,

and investment internationally, and a healthy noninf lationary growth in the world economy, both by
assuring relatively stable monetary arrangements and
by minimizing pressures for administrative controls on
either trade or capital.
(c)

Safeguards against speculative or other

disturbances that threaten a breakdown of the basic
framework of the system.
(d)

Politically, a substantial element of U.S.

control, in order to safeguard the legitimate U.S.
interest in (a) or (b) above.

However, in the interest

of facilitating international harmony, the appearance
of U.S. hegemony should not be sought.

In more concrete

terms, this tends to point to the desirability of
working in a context of multilateral consultation and
cooperation, so long as this does not, by reducing
progress to the lowest common denominator, frustrate
needed change.
The Present Setting
15.

The current tensions in the international financial

area both point to the urgent need for constructive change and
severely constrict our freedom of choice in what changes we
can seek.




At the same time, certain potential crises could be
CONFIDENTIAL'- LIMDIS

Reproduced at tne National Arcmves

- 14 seized upon for encouraging constructive change.

The most

serious imbalances outside the U.S. in terms of the likelihood
and imminence of their precipitating another foreign exchange
crisis are in Europe.
(a)

The French franc is in a weak position, and the

French are steadily losing reserves at a heavy rate.

A

French decision to depreciate the franc moderately could
come at any time, though the general expectation is
that the French might prefer to couple this with a
simultaneous German revaluation, waiting until after the
German election in the hope of doing so if their reserves
and credit lines hold out.

Such a devaluation,

particularly if unilateral, could add to the pressure
on sterling and other currencies and might induce other
devaluations.

Such depreciations could adversely affect

the United States trade position, add to pressures
on the dollar, and thus further undermine the stability
of the system.

This would tend to force one of the more

drastic solutions on our part (discussed below), but at
the same time reduce the prospects for the most desir­
able results.
(b)

The German mark is undervalued, and is a

strong focus for speculation.

Revaluation of the mark

and of any other currencies of surplus countries would




CONFIDE m ZAL - LIMDIS

Reproduced at tne National Arcrwes

_r,
OTJFTrVRMr R . — LIMDIS
PT T

- 15 assist our own competitive position, and, more importantly,
reduce or eliminate prospects for a French (or U.K.)
devaluation spreading.

Consequently, a German revaluation,

joined if possible by other strong currencies, remains
a highly desirable goal.

The more or less imminent

prospect of a French devaluation could be the catalyst
for such a multilateral realignment, but the scope for
the U.S. to influence the outcome is limited by the
strong internal political repercussions of exchange rate
changes.
(c)

The pound sterling has withstood fairly well

the speculation in the German mark in recent months, and
losses of reserves have not been excessive.

However, the

U.K. position remains very weak, with very large emergency
credits to be repaid or refunded in the next few years,
and with only very slender reserves available.

A

reserve loss of several hundred million dollars could
force the British to devalue, adopt a floating rate, or
impose import restrictions.

While at the moment they

are less likely to precipitate an exchange crisis than
the French, there is a real danger that sterling might
not survive a unilateral French devaluation, not accompanied
by a German upward adjustment.




'CONFIDENTIAL - LIMDIS

Keproaucea at tne National arcnive:

U.S. Balance of Payments
16.

Despite continued serious imbalances in U.S.

international accounts, the dollar has been relatively
strong on the exchange markets in recent months.

However,

this strength is accounted for mainly by unsustainably
large short-term capital inflows induced by increasingly
tight money in this country.
17.

For the time being, these inflows, generated primarily

through U.S. banks' branches abroad, have kept dollars out of
foreign official hands, and have thus greatly improved our
official settlements balance.

In fact, the increase of some

$7 billion in the takings of Euro-dollars by U.S. banks in
the first half of this year has pulled a sizeable amount
of dollars out of existing foreign official reserves, with
the result that we have a surplus of more than $2 billion
on the official settlements basis.
18.

At the same time, we are headed for a record

deficit measured on the liquidity basis, which counts as
liabilities dollars in foreign private hands
foreign branches of U.S. banks).

(including

This deficit, paradoxically,

is also exaggerated by tight money, since a large volume
of U.S. funds has apparently been shifted to the Euro-dollar
market to take advantage of very high interest rates there.
addition, large outflows of corporate money were stimulated




- LIMDIS

In

Keproaucea at tne National Arcmves

-C^NFTPFNTTATi - LIMDIS
- 17 by the recent mark crisis, with the result that the liquidity
deficit is already nearly $5 billion, larger than the previous
record deficit for an entire year ($4 billion).
19.

While one can adduce various explanations for the

bizarre behavior of our international accounts in recent
months, there is little doubt that the size of our liquidity
deficit will come as a shock to the markets and foreign officials.
If one could argue that current results were entirely an aber­
ration from an otherwise strong U.S. balance of payments
performance, the difficulties would be minimized.
this is not the case.

Unfortunately,

Our trade balance has deteriorated

sharply from its traditional sizeable surplus into deficit.
Longer term capital outflows

(particularly direct investment),

which were depressed in 1968 by the "once-for-all" first-year
impact of the mandatory control program, will be much higher
this year.

Gross military spending of $4.5 billion overseas

remains a heavy drain, as does net tourist spending overseas
of $1.8 billion.

Capital inflows, particularly into U.S.

stocks, have been tapering off in recent months, and the
upward trend in earnings on our overseas investments will not
offset these drains.
20.

Our trade balance should improve as the overheating

of the domestic economy ends, but this favorable influence is
likely to be both slow and limited.




Moreover, an easing of

COW FTDEUTIAL - LIMDIS

Reproduced at tne National Arcmves

^ N F I D E H T I A L. - LIMDIS
- 18 money in the

U.S. will tend to expose the underlying weakness

in our balance of payments structure.
21.

Looking further into the future, the rising competitive

power of Japan, Germany, and Italy, our deteriorating trade
position with Canada, and the structure of our imports and
exports, suggest great difficulty in rebuilding a large trade
surplus - say more than $l-$2 billion - over the next 3 to
5 years.

An ending of the Vietnam conflict would provide

important psychological relief, but direct foreign exchange
costs

(running more than $1-1/2 billion per year) could not be

expected to decline rapidly.

Growth in our earnings on foreign

investments should provide some relief, but not enough to achieve
a large and sustained current account surplus.

Thus, on present

prospects, even if we succeed in reducing appreciably the
rate of inflation, our payments position will be dependent upon
a much more balanced position on capital accounts than in the
past.

While such a balanced position was achieved last year,

this was unusual, and probably not sustainable or desirable
in terms of the U.S. savings potential, capital markets, and
wealth.
22.

All this means that until appropriate changes can

be made in commercial policy, world trading rules, and/or
monetary arrangements, our balance of payments position will
continue to require the protection of capital controls.




COMriDEHTIAL - LIMDIS

Reproduced at the National Archives

rnwirTnmjTT&T. - LIMDIS
- 19 More generally, our relatively weak competitive position
(reflected in the absence of a trade surplus) tends to
undermine the financial leadership of the U.S. and limits
our ability to shape the monetary system in the most
constructive manner.

Thus, our balance of payments outlook

both increases the urgency of change and limits our options.
23.

For both the period immediately ahead and the

medium-term future, the dominant factor affecting the
evolution of the international monetary system (and our
success in guiding that evolution) will be our ability to
contain domestic inflationary forces.

The symptoms of

inflationary psychology apparent in domestic financial
markets -- skyrocketing interest rates, heavy strains on
financial institutions that operate within the framework
of fixed-interest obligations, increasing insistence on equity
"kickers" by lenders, and the tendency of borrowers to anticipate
needs —

have parallels in international markets.

These strains

have been tolerable, and they should remain so as long as the
business and financial community —
financial officials —

and responsible foreign

have reason to believe that they are short-

run costs of restoring reasonable price stability.

Should that

belief be undermined, the risks of a major confidence crisis will
be greatly increased.

(A failure to maintain the surcharge would

be a signal of our inability to control inflation in many foreign
eyes.)




COMFIDEHTIM. - LIMDIS

Keproaucea at tne National Arcmves

-CONFIBBN^I-Mr - LIMDIS

- 20 24.

Lack of confidence in relative U.S. price stability

(and thus in the future value of the dollar internationally)
would for all practical purposes make it impossible to negotiate
toward our objectives in deliberate evolutionary steps.

Instead,

we would be faced with the prospect of (1) taking one of the
more "radical" options in an environment that maximizes
uncertainty and unfavorable repercussions, or (2) in an effort
to avoid these options and preserve the stability of the system,
accepting strict limitations on our ability to finance future
deficits in our balance of payments with dollar liabilities.
The latter restrictions might be associated with some foreign
acquiescence in consolidating our extended foreign financial
position, but the clear implication would be heavy reliance on
controls to avoid an unsustainably large loss of gold.
Major options in the longer-term evolution of the monetary system
25.

One approach toward the monetary system would be

to attempt to preserve the present arrangements more or less
intact, perhaps supplemented in time by a modest activation
of Special Drawing Rights.

Provided money remains relatively

tight in the U.S. and there are clear signs of progress toward
dealing with domestic inflation, this passive approach might
be sustainable for a considerable period, barring spreading
devaluations abroad and assuming a willingness on the part of
the U.S. to incur substantially more external debt through the




eOHFIPElTTIMi - LIMDIS

Keproauced at tne National Arcmves

CONFirffiHTT-ftT. - LIMDIS

- 21 IMF or direct bilateral borrowing.

It would, however, offer

no basis for confidence that, under pressure from foreign
creditors, we could escape in coming years from continuing and
probably more intensive use of selective balance of payments
measures.

These might include not only controls on capital,

but also strong restrictions on government overseas spending,
a series of ad hoc incentives to exporters and barriers to
imports.

One possibility along this line would be a general

tax on imports, perhaps accompanied by corresponding payments
to exporters.
26.

The ultimate success of such an approach in terms of the

basic objectives cited earlier, would be dependent on a combina­
tion of an exceptionally favorable performance at home in control­
ling inflation and stronger tendencies abroad toward inflation
and a deteriorating competitive position.

This is not impossible:

e.g., France turned quickly from a persistent surplus to
a deficit country.

However, the likelihood of success is too

small to recommend this course of action, and it implies sub­
stantial risks in terms of a breakdown of the system.
27.

Consideration may be given to three alternative

broad courses of action:

(a) a series of multilateral

negotiations pointing toward a fundamental, but "evolutionary"
change in the existing system;




(b) suspension of the present

-GOHFIDENTIAL *- LIMDIS

Keproaucea at me National Arcmves

CONFIDENTIAL - LIMDIS
-

- 22 United States policy of providing for the conversion of dollars
held by foreign monetary authorities at their d i s c r etion;^
and (c) a change, large or small, in the official price of
gold.
28.

These courses of action are not necessarily mutually

exclusive in all aspects.

For example, even the existing

inhibitions on convertibility affect attitudes toward fa)
above, and the prospect of (b) is a factor in foreign calcu­
lations.

However, these courses do represent three quite

different basic concepts and focuses for action, each with
different problems and advantages.
29.

The paragraphs that follow describe these options

briefly and suggest the strengths and weaknesses of each.
Negotiated multilateral evolution
30.

In the months since this Administration has taken

office, our efforts in the international monetary area have,
in good part, been directed toward probing intensively
prospects for progress toward negotiating evolutionary reform
in the international monetary system.

The major elements in

carrying forward this approach would be:
T7

It has been pointed out t h a t t h e r e is already a substantial
amount of de facto inhibition on gold conversions by foreign
monetary authorities, and that a formal understanding not to
convert exists in the case of Germany — hence this course is
not, strictly speaking, clearly "non-evolutionary" in all
respects.




COMPIDE1TTIAL - LIMDIS

Keproaucea at tne National arcmves

-eONFTPEHTIAL ~ LIMDIS
- 23 (a)

Early and sizeable activation of the Special

Drawing Rights scheme.

This would provide needed

assurance that international reserves could be provided
on a sufficient scale in coming years by constituted
multilateral procedures to importantly relieve developing
strains and tensions on the monetary system.

Although

its usefulness in directly financing our deficits
will be limited, activation on a sufficient scale will
facilitate balance of payments adjustment by surplus
countries and will therefore relieve some of the pressures
within the system that tend to perpetuate U.S. deficits.
Activation should have a distinctly favorable effect on
confidence, and it will be an important step toward
confirming the diminishing role for gold in the system
and in relieving pressures for an increase in the gold
price.

To achieve these objectives fully, activation

would need to be on a scale substantially larger than
the $2 billion per year figure now in the minds of many
Europeans for the first five years; amounts of $4 billion
a year would be desirable, but probably unobtainable.
(b)

Some realignment of existing exchange rate

parities now biased against the U.S.

This is discussed

fully in paragraphs 57 and 58.
(c)

Activation of Special Drawing Rights would

be followed by active and sympathetic exploration of the
various techniques for introducing a greater degree of




OmFfOFHTTAT.

LIMDIS

Keproaucea at me National Arcmves

’ MPtn^Tir
‘m

_ LIMDIS

- 24 exchange rate flexibility into the monetary system.

No

international consensus now exists in this area, and a long
period of consideration, running to two or more years,
could be expected before any negotiated agreement is reached.
However, there is a distinct possibility that one or
possibly more countries (e.g., Germany) could be encouraged
to introduce some form of limited flexibility upon their
own initiative without awaiting a fully multilateral
consensus, and it is possible that such limited steps
could be distinctly useful, both in themselves and in
gaining experience.

Important problems would arise

in making sure that any new exchange rate practices
are not biased in the direction of depreciations
vis-a-vis the U.S. dollar (on the contrary, they
should be aimed at relieving pressures on our own
trading position), will not provoke speculative
tendencies, and would not so damage the reserve currency
role of the dollar as to unduly limit our own financing
flexibility.
(d)

Expansion of IMF quotas.

review is due in 1970.

The quinquennial

Because of the complex and time-

consuming nature of quota negotiations, we hope to defer
serious consideration of quotas until after SDR activation.
In 1970 we may wish to enlarge the U.S. quota to retain
our strategic voting position and to enlarge our credit




CONFIDENTIAL » LIMDIS

Keproducea at tne National Arcnive

CONFIDENTIAL-- LIMDIS
- 25 facilities at the Fund, but this is not of crucial
importance to us as it is to certain other countries.
(e)

At some stage we may wish to explore the

feasibility and desirability of so-called "reserve
settlement accounts".

This approach would be designed

to consolidate the different types of international
reserves (gold, dollars, and SDR's) in one more or
less homogeneous asset, thus adding to the stability of
the system and further circumscribing the role of gold.
However, while such arrangements would tend to con­
solidate existing dollar balances, there would be
an effort to put restrictions on the further growth
of the dollar element in reserves, thus restricting
our flexibility in financing deficits.

Both the United

States and other participants would lose control of
substantial parts of their gold reserves to an international
pool of reserves.

Consequently, this element in monetary

reform would need to be approached with definite caution,
and probably will be by other countries.

It would be

beneficial only if sufficient flexibility was to be achieved
in other directions.
(f)

Continued and strong efforts toward removing

structural impediments to U.S. trade and reducing the
balance of payments costs of our defense efforts.




COWriPENTIAIa - LIMDIS

This

Keproduced at tne National Arcnives

j
CONFIDENTIAL

- LIMDIS

- 26 would require an aggressive negotiating posture aimed
at reaching a new modus vivendi with respect to
border taxes that would help eliminate the present
bias against the U.S.

We would also seek to diminish

other non-tariff barriers where the case is strong
(Japan is a case in point), recognizing this is a
complex and time-consuming area in which the U.S.
is not free of criticism.

Better and more permanent

offset agreements would also be sought.
31.

If successful, this negotiated evolutionary approach

would offer substantial advantages.
(a)

From the standpoint of the United States,

success in negotiations over a protracted period
would require control of inflation and continued
emphasis on strenghtening our balance of payments, but
in the end we should restore a considerable flexibility
for domestic economic policy and for meeting our shifting
security requirements while completing the phasing out
of present controls.

Given the present setting and

pressures, this would represent a real accomplishment.
(b)

Politically, while definitely implying a

gradually increasing participation and responsibility
for other countries in the mangement of the international
monetary system commensurate with their growing economic
power, it would retain for an indefinite period a major
role for the dollar and monetary leadership of the
V
.

United States.




CONFIDENTIAL'- LIMDIS

Reproduced at the National Arcmves

-j
CQNFIDEWTfftSj - LIMDIS
- 27 (c)

Economically, it would preserve a unified

monetary structure for the free world, with clearly
defined rules of the game.

It would be a counter-force

to pressures toward blocs and divisive forces.

It

would be fully consistent with and tend to support a
multilateral framework of rules to promote liberal
trade and investment policies worldwide.
(d)

This course involves no; sudden and disturbing

changes in the international monetary system as it
has evolved from Bretton Woods.

It is fully consistent

with the general effort to promote international
cooperation and collaboration in other areas among
major countries.
32.

Against these advantages, there are apparent

difficulties in this approach.
(a)

The necessity of moving ahead by consensus among

the major European countries and in the IMF ties us
to a negotiating framework in which progress can
proceed at a sluggish pace, governed by the least
common denominator.

These negotiating difficulties

can be intensified by such political roadblocks as
the intransigent attitude taken by the French in
recent years.

We would need to cope continuously with

the conservative bias of many European officials.




eONPI-DEHTIAL'- LIMDIS

At

Reproduced at the National Archives

gCONriDENTIftg - LIMDIS
-

- 28 the least, this course might imply personal intervention
at the head of state level from time to time to get
over specific hurdles.
(b)

The apparently deliberate pace of international

monetary negotiations may not bring change soon
enough to forestall the breakdown of the system, partic­
ularly if our own inflation is not brought under visible
control and we are unsuccessful in turning the trend
of our trade balance.
(c)

Commitment to this course would entail negotiating

some limitations on our own future freedom of action,
and these limitations would tend to become embedded
in the structure of the IMF and other international
organizations.

To some degree, this process has been

started in the course of the negotiation of the SDR
scheme, where European agreement was purchased only
at the expense of increasing their relative power
position within the IMF.

This potential loss of flexi­

bility will be more theoretical than real, if the basic
American trade position remains relatively weak, but
could be restricting at some future time when the
relative strength of the U.S. economy and our competitive
position are stronger.




COMPrDENTIAt - LIMDIS

Keproaucea at tne National Arcmves

^-<30MriDEHTIAll* - LIMDIS
- 29 -

Suspension of Gold Convertibility
33.

At the present time, the United States maintains

the formal posture of converting dollars into gold at the
discretion of foreign monetary authorities.

However, con­

versions have in fact been relatively small since the flurry
following the establishment of the two-tier gold system.i^
The German authorities have stated in a letter that they
do not intend to present dollars for gold, though this intention
could be changed under different conditions.

Informally,

Japan, the United Kingdom and a number of other countries
have been generally discouraged from acquiring gold.

(Only

in the case of Japan has the question been raised with this
Administration, and then only tentatively.)
34.

Outright suspension of the gold convertibility of

the dollar for foreign monetary authorities could either be
forced upon us by events or could be taken as a deliberate
considered action.

In either case, such suspension represents

a departure from the negotiated multilateral settlement approach
and, unless clearly forced upon us by a crisis, would tend to
be considered by foreign countries as a U.S. power play.
However accomplished, it would contain the seeds of political
divisiveness, although the degree of risk would differ,
depending on the particular approach and procedures adopted.

1/ Gross sales of gold were about $600 million in the period
April 1, 1968, to June 20, 1969. From July 1, 1968, to
June 30, 1969, the corresponding figure was about $300 million.




LIMDIS

Reproduced at the National Archives

GONFIDENT 1RL - LIMDIS
■ B O ­
SS.

Two broad substantive approaches might be considered:
(a)

While suspending formal gold convertibility,

we would retain the option, at our discretion, to
convert dollars from time to time in a given situation
when it suited our own objectives, through a combination
of gold sales, IMF drawings, or other devices.

At least

initially, it could be maintained that such practices
are consistent with the basic structure and rules of the
IMF.
(b)

At the other extreme, we could simply announce

the suspension of any obligation to convert foreign-held
dollars and adopt an essentially passive role vis-a-vis
foreign dollar holders.

This would more clearly appear

inconsistent with current IMF principles and rules.
36.

Particularly in the latter case, the result would be

to require other countries to face directly the question as
to whether they (a) wish to maintain their exchange rates by
accumulating dollars, (b) wish to let their currencies
appreciate to hold dollar accumulations down, or (c)
apply, at their own initiative, some form of controls on the
inflow of dollars (most likely on U.S. investment), and/or
stimulate the outflow of capital.

The Continental European

countries might attempt, despite difficult obstacles, to form
a monetary block of their own.

In any case, the degree to

which they would permit their currencies to appreciate, rather
than introducing controls, designed to limit dollar accruals,




COMF1DEHTIAlfi- LIMDIS
c




Keproaucea at the National Arcnives

^CONFIDENTIAL > LIMDIS
■
- 31 -

is highly problematical.

On the other hand, it seems likely

that a large number of our close trading partners and less developed
countries would prefer alternative (a), so long as the United
States retained reasonable price stability and our basic
competitive position did not deteriorate markedly.

The

result would be an informal "dollar bloc" in which countries
heavily dependent on trade and/or financial relations with
the United States would "tie" their currencies to the dollar.
We could encourage this development by certain preferences.
37.

The uncertainties and potentially divisive risks of

suspension could be ameliorated by choosing the first of the
sub-options cited, i.e., a measure of convertibility but with a
substantial degree of discretion in converting foreign dollar
holdings, using various reserve assets to do so.

Moreover, the

political repercussions would also be limited if such a step
were taken only in response to crisis, rather than under
conditions suggesting that it was a deliberate act of U.S.
policy.

However, this approach would be sustainable only in

a situation in which our own basic balance of payments and
competitive position tended to strengthen.

Otherwise, it

might buy only a limited period of time, since it would probably
imply relatively heavy use of gold and other assets in settling
balances, and extensive use of foreign borrowings.

^ W T r F N T T M , n LIMDIS

Reproduced at tne National Arcmves

gQfliriDENT-EMr + LIMDIS
: -- 32 -

38.

The major objective and potential advantage of

suspension, either on a limited or comprehensive basis, would
be to strengthen the real, and also the negotiating position of
the U.S. by (a) eliminating or reducing the possibility of a run
on our gold stock and (b) by increasing the pressures on surplus
countries to adjust by presenting them with essentially unpalat­
able alternatives.

The successful outcome rests in part on the

proposition that most foreign countries, and particularly the
leading powers of Europe, would have much more to lose from
a move away from cooperation and orderly development in the
international monetary system than the United States.

Conse­

quently, they would have strong incentives to make responses
relatively favorable to us —

i.e., passively hold dollars

or permit a gradual appreciation of their currencies.

If

successfully carried off, the United States would retrieve
for itself a very substantial degree of flexibility in
financing future balance of payments deficits and would remain
in an extremely strong position for guiding future changes in
the international monetary system.
39.

On the other hand, this course involves some major

economic and political risks.

The economic risks grow out of

the inherent uncertainties of this course; there is no as­
surance, for example, that major countries would accept the
choice between accumulating dollars and appreciating, but




COWFIPEWTIAL - ■ LIMDIS

Keproaucea at Die National Arcnives

CONFIDENTIAL■ LIMDIS
- 33 rather would resort to controls, probably aimed at reducing
capital imports.

Moreover, the fact that the United States

may be less harmfully affected than other countries by the
additional strain on international monetary cooperation does
not, in itself, make this a happy prospect.

These risks could

be minimized only if the United States were successful in its
anti-inflationary efforts at home and in improving the structure
of its balance of payments.

Consequently, the theoretical

flexibility afforded by this approach could not safely be fully
utilized, at least in the short run.

Politically, this

potentially divisive act could affect cooperation with foreign
governments in other spheres.

In the meantime, the possibility

that the United States might follow this course may serve as a
sort of lever to get action in other areas.
The Gold Options
40.

Two variants of a change in the price of gold may

be considered:
(a)

A small increase of 10 percent to 20 percent

to promote multilateral realignment of exchange rates
in which the dollar would be devalued relative to a
number of other major currencies.
(b)

A large increase (to a range of $70 to $100)

in an attempt to reestablish a strong U.S.
reserve position and to saturate both foreign official
and private demands for gold, thus providing a base for
maintaining gold convertibility and fixed exchange
rates.




rONFTnnFITT AT, - LIMDIS

Reproduced at the National Archives

CONFIDENTIAL*- LIMDIS
- 34 -

41.

A compromise approach of changing the price by an

intermediate amount (say, 30 percent to 70 percent)
carries the disadvantages inherent in a larger change, while
practically eliminating any chance of reducing the
balance of payments constraints on the U.S.

It therefore

can be rejected outright, although this is likely to be
the preferred alternative of some Continental European
monetary officials if the gold price question should be
seriously opened.
42.

Any proposal to change the gold price must take

account of the legal and political obstacles.

Legally,

Congressional sanction would need to be obtained, and a Republican
Administration would be forced to seek approval from an opposition
Congress with liberal economic leadership strongly against a
gold-price change.

Republican Banking and Currency Committee

leadership (e.g., Widnall) shares this view.
debate —

Extended emotional

even if finally won on the basis of ratifying a

"fait accompli" —

would at the least magnify the market

uncertainties and tend to exacerbate the intuitive association
of devaluation by the man in the street with inflation, broken
promises, and monetary instability.
43.

A change in the price of gold does not per se imply

any change in exchange rates of foreign currencies against the
dollar.

However, it has been argued that a small devaluation

of the dollar in terms of gold would facilitate appreciation of
other currencies relative to the dollar, and thus achieve an
improvement in our international competitive position.




COWFIPEHTIAL_j LIMDIS

In

Reproduced at tne National Arcmves

— fcOHriDDMTIAtti - LIMDIS
- 35 -

certain negotiating situations, this is possible.

For example,

the Germans and Swiss might well be willing to "stand still" if
the U. S. devalued by no more than 10 percent (or to move only
part way if the devaluation were larger).

However, for the

foreseeable future, nearly all other countries —
all the large ones —

including

would be expected to follow the dollar,

or to devalue by even more.
44.

In addition to facilitating a limited realignment

(which might still be achieved so far as the key countries
of Germany and Switzerland are concerned without the gold
price change), a small increase in the gold price would
modestly increase world liquidity and increase the profit­
ability of gold mining.

At the same time, it has been argued

that so small a change might be achieved consistent with other
reforms, and without inequitably rewarding present gold
holders.
45.

These limited advantages would be offset by

substantial disadvantages:
(a)

A small change would in itself create

strong expectations of still further changes, and
thus strongly reinforce central bankers' preferences for
gold as a reserve asset.

This would create forces weakening

the dollar and greatly accelerating demands on our gold
stock.

Since our reserve position would not be significantly

strenghtened, the suspension option (or a much higher
gold price) would be forced in unfavorable circumstances.




^NFTPFNTTAT'. - LIMDIS

Keproaucea at tne National Arcnives

SOHriDENTIAL' - LIMDIS
- 36 -

(b)

Politically, the direct benefits, while limited

in amount, would still be inequitably distributed,
favoring a small group of European gold holders at
the expense of those who have cooperated by holding
dollars in the past (e.g., Japan, which has repeatedly
expressed the view that a change in the gold price
would be politically intolerable for the present
government).
(c)

In exchange for a limited rate realignment,

a signal that the gold price is negotiable is likely to
strengthen resistance to other reforms, such as
SDR's and rate flexibility, by those skeptical of
such reforms.
46.

As a result, the approach of accepting a small

gold price change simply to achieve realignment is untenable.
The further question has been raised as to including such a
change in a much larger package containing substantially all
the other elements set forth earlier as part of the "multilateral
approach".

Our considered judgment is that this could not

practicably be negotiated.

Indeed, any evidence that the

gold price is "negotiable" as part of the "multilateral
approach" would tend to weaken our hand and jeopardize success
by encouraging some Europeans to force a "gold solution"
at the expense of other reforms.




ronrinniTTnT,

limdis

«MriDENTIAfr>- LIMDIS

Kpouea,ealnlrnvs
efacalnNt0aAcie

- 37 47.

This leaves only the option for a massive increase

in the gold price.

The "Rueffian" version of this approach

favored by some Europeans (including particularly Mr. Debre
in France) can be ruled out as undesirable from the U. S.
standpoint.

This would contemplate that the large increase

in the gold price be accompanied by elimination of existing
holdings of dollars from world reserves and a foreswearing
by other countries of adding to dollar holdings in the future.
Gold would again resume a central and unique role as an
international reserve asset.

The U.S. would be expected

to utilize the revaluation profits on its own gold stock
to repurchase outstanding dollar liabilities or to compensate
other countries with relatively little gold for their failure
to participate proportionately in these profits.

The net

result (and the basic objective) would thus be to impose
discipline on the U.S., to restore the rigidity of exchange
rates, and eliminate flexibility in handling balance of
payments deficits in the future.
48.

A massive increase in the price of gold might be

considered without the accompanying "Rueffian" constraints,
but rather on the presumption of continued foreign dollar
holdings.

The objective would be to obtain a strengthening

of our reserve position, greatly enhance world liquidity,
satisfy both central bank and private demands for gold, and
thus increase our financing flexibility.

As in the case

of a moderate gold revaluation, Germany and Switzerland might




COWriDEHTIAL- - LIMDIS
j

Keproaucea at tne National Arcnives

^-CONFIDENTIAL. - LIMDIS
- 38 -

permit some appreciation in their currencies, and the massive
increase in liquidity would help provide better assurance
of the ability of most countries to maintain their exchange
parities.
49.

On the other hand, there are definite weaknesses

in this approach.




(a)

Countries holding substantial amounts of

dollars in their reserves on the basis of earlier
U.S. assurances of a stable official gold price
would be seriously embarrassed (the Japanese say
the government would fall), and would end up with a
much smaller share of global reserves than at present.
European gold-holders, and the USSR and South Africa,
as major producers, would be major beneficiaries;
Canada, Japan, Scandinavia and the developing countries
would be major losers.
(b)

The plain inequities involved in a massive

gold price increase would lead to strong demands
that the U.S. provide compensation to the "losers"
out of its own devaluation "profit".

These competing

claims would be a continuing sore point in international
relationships, and to the extent the U.S. decided to
provide compensation, the desired strengthening of our
reserve position would be undermined.
C O N F T D E N T i A L ^ LIMDIS

Keproduced at the National Arcmves

flONFTnFNTIA.tr r LIMDIS
- 39 -

(c)

To assure success by eliminating expectations

of further increases, there would be a strong incentive
to increase the price by more than doubling it, making
the inequities worse in the process.

The abrupt

addition of $40-$80 billion to world reserves (presently
totaling $76 billion) would have a plain inflationary
potential.

Despite efforts to sterilize the excess

liquidity, this would only exacerbate the virtually
world-wide problem of coping with inflation and
inflationary psychology.
(d)

Past experience with sterling devaluation

in the 1930*s suggests many countries would want to
exchange their dollar reserves (apart from limited
working balances) for gold following a large
price change.

Moreover, the United States might be

expected to finance more of any future deficit in
\

gold rather than dollars, the argument being made that
the United States could now afford to do so.

The

result is that available financing for continuing
balance of payments deficits (and thus our ability to lift
controls on foreign investment and on governmental outlays)
would probably be improved only briefly, and then only by
a few billion dollars.

A recurrence of the present

problem could‘
be anticipated within relatively few years.




rONFTPFNTIAL - LIMDIS

Reproduced at tne National Arcmves

(e)

-CONFIDENTfAL - LIMDIS
- 40 We would lose o p t i o n s i n dealing with

this future problem because a massive gold price
increase would shelve indefinitely prospects for
agreed monetary reforms along the lines outlined under
the first option.

Instead, the role of gold in the

system would be reinforced for a generation.
(f)

In a sense, this would reverse the broad

historical trend of monetary evolution away from a
dominant role of metal to control by men.
50.

The conclusion on the massive gold price option

is that the positive results in terms of relieving the
immediate financial pressures would be limited and likely
to be short lived, while the political and economic dis­
advantages are weighty and fundamental.

It does not seem to

offer a way out.
Current Issues
51.

The United States in recent months has been

engaged in probing the prospects for negotiating orderly
multilateral evolution, particularly through activation of
SDR1s and, subsequently, some form of limited exchange flexi­
bility.

This approach does not rule out a shift, to another

option, should (a) United States reserve losses become
excessive, or (b) there be convincing evidence that progress
in negotiations is clearly short of what is essential.
52.

There are three issues on which the United States

must now take a firm negotiating posture.

These are:

(a)

amount of Special Drawing Rights to be activated, (b) our
attitude on currency realignment, and (c) our support for




CONFIDENTIAL * LIMDIS

the

Keproauceo at me National Arcmves

^rnMFiDBffiFjRcr- l i m d i s
- 41 sterling through additional credit.

In addition, our public

posture on proposals for limited exchange flexibility needs
to be considered.
53.

We should also have a reasonably firm idea of

how far we are prepared to see our gold reserves decline during
the next year or two, and how our attitude toward gold losses
will be affected by allocations of Special Drawing Rights.
54.

Finally, some preliminary indications as to the

way in which we would proceed, if we felt it necessary to
move into the second option, would be useful.
Activation of Special Drawing Rights
55.

It is suggested that the United States should, during

the negotiations within the Group of Ten at the end of June and
in July, take the position that economic logic points toward
an annual amount of SDR's of $4 to $4-1/2 billion over the
next five years.

The United States share would then be about

$1 to $1-1/4 billion a year, roughly the maximum permitted under
present U.S. legislation.
56.

This figure is approximately double the figure

of $2 billion a year regarded as a maximum illustrative figure
in 1968 —

a figure many Europeans now accept as a minimum.

The higher $4 to $4.5 billion figure is fully defensible in
terms of past trends in reserve growth, and the need to
strengthen the reserve positions of the United States, the
United Kingdom, and France.

Nevertheless, we anticipate

strong resistance from a half dozen of the conservative




eOMriPBNTIAti - LIMDIS

Keproaucea at tne National

■CONFIDENTIAL - LIMDIS
- 42 -

European countries, and we would clearly have to be prepared
to compromise•

The crucial question is how small a figure the

United States might eventually be willing to accept.

It is

believed that the earlier maximum figure of $2 billion a year
is too small.

Failure to achieve agreement on a larger amount

would be one of the important factors pointing toward a shift
to the second option of suspension.

On the other hand,

reversion to a smaller figure of $2 - $2-1/2 billion following
larger initial amounts for, say two years, could provide a
basis for agreement.
Realignment of Exchange Rates and the Defense of Sterling
57.

The prospects for a French devaluation have increased

in the past month, and a decision may be forced by continuing
reserve losses within a matter of weeks.

Such a devaluation,

unless of small size and accompanied by at least as large
(and preferably larger) German revaluation, would be a serious
setback to the position of the dollar since it would encourage
still more devaluations.

Thus, the key to a successful outcome

remains in the hands of the Germans.

Moreover, there would be

decided advantages if German revaluation were to be accompanied
by appreciation of the Swiss franc and currencies of other
countries with strong German trade ties, such as the Netherlands
and Austria.

While a strong economic case can be made for

appreciation of the Italian lira or Japanese yen, there appears
no reasonable hope for such action.




■
CONFIDENTIAL*- LIMDIS

Reproduced at the National Arcmves

^ X QNFIPENTIAIr - LIMIDS
- 43 58.

We share the view of the British Government that

there should be no change in the present rate of the pound
sterling.

However, we must recognize that sterling could come

under heavy speculation during the next six months.

Maintenance

of the rate in these circumstances would undoubtedly require
substantial additional credit assistance.

Europeans are

extremely reluctant to provide such assistance, and our own
ability to assist is limited due to already heavy exposure
totaling more than $3-1/2 billion.

The capacity of the Treasury

to provide further assistance without Congressional sanction is
exhausted.

The Federal Reserve could further extend its

$2 billion short-term swap facility (of which $1,140 million
is now utilized), but would find this difficult to justify
without adequate funding arrangements.

Specifically, we may

be faced with the need to fund existing and new credits by
asking for Congressional authority.
59.

In this situation, it seems appropriate for the

United States to indicate to the Germans our serious doubts
that, in the event of a French devaluation, it would be
possible to restore stability to the world’s monetary
system unless the Deutschemark is substantially revalued
(this should preferably be 10% or more, but, practically, 8%
or so may be the feasible limit).

Similarly, the French

should be informed that any devaluation should be
limited to less than 10%, and coordinated with German action.
This might call at an appropriate time for a direct communi­
cation from the President to the head of the German and French




■
COTmDENTIAj- - LIMDIS




Keproducea at tne National Arcmves

^G O WFrDENTIAL - LIMDIS
-

states.

44 -

The pattern of events might compel some form of

ministerial conference, despite disillusionment with the
November 1968 meeting of Ministers in Bonn, and if so we
would prefer a Washington locale under IMF auspices.
Limited Exchange Flexibility
60.

Proposals for a "wider band*’ of exchange rates around

fixed parities, or for "moving parities" have only recently
begun to be examined within governments and central banks.
Another possibility, favored by IMF leadership, is more
flexible use of existing procedures for discrete changes in
parities within the IMF framework.

The United States has

been actively prodding other major countries to examine these
proposals at a technical level, with a view to ascertaining
whether there is sufficient official interest to pursue more
serious multilateral discussion of these techniques.

European

monetary officials tend to resist, but some German, Italian and
Dutch officials have shown interest in one version or another.
One German view of a crawl only in an upward direction vis-a-vis
the dollar, at the discretion of individual countries, could be
a promising approach from our point of view.
61.

While these proposals deal directly with one

of the basic problems of the international financial
system, the process of identifying the specific U.S.
interest in the several variants and the realistic
negotiating possibilities is not complete.

Moreover, open

discussion of this subject is sensitive, for it adds to
the uncertainties in exchange markets, and we do not
06WFTDEWTIAL -~
t,IMDIS

Reproduced at me National Arcmves

CONFIDENTIAL—

LIMDIS

- 45 -

want to divert attention from currency realignment or
SDR activation.

As a practical matter, active negotiations

could not in any event begin until after the September IMF
meeting? that meeting provides a logical forum for stating
openly the U.S. interest and establishing the negotiating
framework.

Meanwhile, the process of private, bilateral

discussion at a policy level should be encouraged as a
means of signifying our interest and to identify
negotiating prospects.
Gold and Reserve Losses, 1969-71
62.

The United States faces the prospect of substantial

payments of gold to the International Monetary Fund
over the next two years.




(a)

A repayment of a Fund demand claim of $800

million covering a loan of Fund gold to the United
States in the late 1950's, the special justification
for which is now gone.
(b)

Gold payments required as part of any

1970-71 enlargement of Fund quotas, amounting to
(i)

approximately $400-$500 million to meet

our obligation to pay one quarter of a rise in
the U.S. quota; a quota increase of $1-1/2 to $2
billion may be needed to retain a strategic 20
percent vote in the Fund;

eONFIBENTSM — y LIMDIS

Keproduced at tne National Arcnives

CQNMDEN'FfMr-- LIMDIS

- 46 (ii)

about

$700-$800

m illio n

of sales to

Japan and a number of small countries to cover
their general and selective quota increases.
63.

In addition, unless we decide to suspend gold

convertibility, we must expect that our gold reserves
would be drawn down further by occasional sales to other
monetary authorities, including the potential for a
rebuilding of French reserves following a devaluation.
64.

Potentially, the anticipated decline in our

gold reserves in 1969-71 could be largely offset by other
reserve gains: specifically these will include our first
two allocations of Special Drawing Rights (a potential of
$1.5 to $2.0 billion) and the automatic gold tranche
drawing right acquired with a U.S. quota increase
($400-$500 million).
65.

The question remains as to how far we are

prepared to see our gold stock decline.

If we are to

embark on the route of negotiated multilateral reform, we
should be prepared to see the gold stock dip as low as
$8 billion.

Something in this magnitude might be needed,

largely because of the present state of public psychology here
and abroad.

A willingness to accept that gold loss

(wholly or partially offset by other gold guaranteed
assets) would in turn enhance the prospects for
negotiating success.

However, a willingness to accept so

large a decline in our gold should be dependent on those
losses mainly reflecting the special IMF transactions
cited above, the absence of a ''run", and clear signs of
negotiating progress.




Reproduced at tne Nauonai Arcmves

CONFIDENTIAL - LIMDIS
- 47 Recommended Course of Action, 1969-70

66.

Success in any approach depends heavily upon

the progress made in restraining inflation.

A reduction in

the burden of expenditures on the war in Vietnam would be a
major plus, not only because of its relation to inflation but
because of its direct balance of payments consequences.
Assuming reasonable progress toward price stability, it is
suggested that the United States proceed with the negotiated
multilateral evolutionary approach.
(a)

We would work toward:

Activation of Special Drawing Rights in a

substantial amount;
(b)

appreciation of the German exchange rate

accompanied by as many smaller countries as possible,
accepting a small French devaluation as a necessary
cost and "trigger";
(c)

after the question of activation of Special

Drawing Rights has been decided, active and sympathetic
exploration of the various forms of limited exchange
rate flexibility, weighted on the side of gradual
appreciation of strong currencies.
67.

We must, however, recognize that either external

developments or a negotiating impasse may at some time, and
perhaps soon, justify use of the "suspension" option.

If

this is to be the case, there is no reason to believe
that we will have lost anything by moving forward along the
lines of multilateral evolution, assuming we avoid any new
commitments to the contrary in the negotiating process.




COTTFlDEHTim - LIMDIS

Reproduced at tne National Arcnives

e O N F lL )E N T T ^ L - LIMDIS

- 48 -

68.

A basic aim of changes in the monetary system

is to provide a framework for improving the U.S. balance
of payments without reliance on controls, to free
domestic economic and foreign policy from constraints
imposed by weaknesses in the financial system, and to
restore financing flexibility.

Our success in negotiating

these longer-term objectives would, however, be gravely
jeopardized by the suspicion or reality that we fail to
recognize present balance of payments "disciplines".
To assure consistency, a decision in this area thus
should be followed by a complementary analysis of our
current balance of payments effort.




GeN K P BHTIAlr - LIMDIS


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102