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CONFIDENTIAL

T H E C H A IR M A N O F T H E
C O U N C IL O F E C O N O M IC A D V IS E R S
W A S H IN G T O N

June 25, 1969

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MEMORANDUM FOR THE PRESIDENT

Subject: "Basic Options in International Monetary A ffairs"

The "Basic Options" paper prepared by the Volcker Group
is a clear and perceptive summary of the major international
financial issues.

I
The Council of Economic Advisers, which has participated
in the drafting of this paper, is in general agreement with its
formulation of the options and with its recommendations. In
particular, I agree that the evolutionary approach now being
followed (option a) should be pursued. I take a more positive
/view of the merits of limited exchange rale flexibility than the
V paper does, but since the U. S. dollar would not move under
such a scheme, our bargaining position in advocating this
scheme is admittedly limited. It should nevertheless be stressed
that our hopes of establishing a less crisis-prone international
monetary system rest primarily on achieving limited flexibility.
, The fear that an endorsement of limited flexibility would further
unsettle the foreign exchange markets seems exaggerated, and
^ it tends to induce inaction on this matter.
I also agree with the paper in regarding the suspension of
gold convertibility (option b) as a major break in international
cooperation, and therefore not to be undertaken unless the
evolutionary approach turns out to be unpromising. In particular,
I do not support the view, implied in para. 56, that we should
| suspend convertibility if the other countries are unwilling to
I activate more than $2 billion in SDR's (Special Drawing Rights)
I per year. Although SDR's will no doubt be an important addition




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to international liquidity, this additional liquidity can make only
a modest contribution to the adjustment process by which nations
with different rates of price movements, different objectives of
economic policy, and different rates of technological development
adjust to each other. It is the present system’ s inability to effect
f these adjustments, by excessive rigidity of exchange rates, that
^ is the main cause of current troubles. Consequently I do not
^aelieve that a large amount of SDR's, while desirable, should be
regarded as the touchstone of success for the evolutionary approach.
I

agree with the report's rejection of an increase in the gold
price, whether large or small. If it ever comes to a choice between
options b and c we should demonetize gold, which is what option b .
amounts to.
II
There are a number of points not fully covered by the paper
which you may wish to pursue in the meeting on Thursday.
1.

. 2.




Public posture and Preaidential leadership. The paper does
not give you anything to say for public use, even though an
insufficient sense of direction on the part of the financial and
business community is a current problem. If you agree to
the evolutionary approach, it might be desirable to recognize
publicly that flexibility of exchange rates must be part of
achieving a less brittle system. Of the two other components of
the evolutionary approach, SDR's are by now somewhat shop­
worn and a realignment of parities cannot be mentioned in
public.
Balance of payments controls. The paper does not hold out
any hope for a further relaxation of controls in the immediate
future. While maintenance of controls is seemingly justified
by the precarious state of our balance of payments, it is not
—
clear that relaxation must await a return to equilibrium. In
fact it is not clear how much controls contribute to reducing
the deficit, and they do come at a heavy cost in other matters.
A subcommittee of the Volcker group is working on this
subject and you may want to express an interest in its
results. Indeed, we might want to consider a phased relaxation

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. of controls as a major pplir.y objective in its own right.
If this puts a strain on the international monetary system,
it would be evidence that the system needs modification.
If we do not press forward here, the momentum generated
by the April 4 relaxation may be lost, and this Administration
may become no less committed to controls than its predecessor.
Sterling. Although I agree that for the moment (say, through
the summer) sterling should hold at its present parity, it
would be most unwise to supply Britain with further credit.
This would require Congressional approval. And it is probably
not in the interest of the United Kingdom to go even further
into debt. Moreover, there are indications that sterling
has a long-term tendency to depreciate, which makes it an
ideal candidate for the so-called crawling peg form of exchange
rate adjustment. Whenever the next sterling crisis erupts,
Britain should be encouraged to adopt such a device in order
to avoid resorting to direct controls.

CONFID ENTIAL,

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