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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Volcker Correspondence -- 1969  Collection: Paul A. Volcker Papers Call Number: MC279  Box 23  Preferred Citation: Volcker Correspondence, 1969; Paul A. Volcker Papers, Box 23; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeron.edu/collections/MC279/c400 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) muddaprinceton.edu   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  MN 6  BANK OF CANADA December 30th, 1969  Mr. Paul A. Volcker, The Under Secretary of the Treasury for Monetary Affairs, Washington, D. C. 20220  Dear Paul, Given the peripatetic life you lead I especially appreciate the fact that you took time to write to me on the occasion of my move from the Bank of Canada to the Department of Finance. Though I may not be in Paris so often in the future, I hope and expect that in my new job I shall have occasion to see you from time to time and share a good cigar together.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  With the compliments of the season, Sincerely yours,  Wm. C. Hood, Adviser  1970   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  December 22, 1969  Dear Bill: Congratulations on your new appointment.  Having once passed myself from the  sanctity of central banking to the turmoil of a finance ministry, I can assure you chances for survival are good. Best wishes. Sincerely, (Sigrea) Paul: Paul A. Volcker Dr. William C. Hood Adviser, Bank of Canada 234 Wellington Street Ottawa 4, Canada  )44  NOV .1 8 1969  Oear gr. ;.e1cClure. I am glad to respond, on behalf of secretary i:ennedy, to your letter of noveNer 5, in which you ask about the possibility of gold purchases from the United States by Japan ard others. The news stories you have read are, I am sure, in connection with the forthcoming incrnases in quotas of the vemers of the International i!',onetary Fund. Quotas in the IL-A? are payal2le 25 rcent in gold and the 1. alance in national currencies. TJnless other arrangew-ents arls made, each mmber will therefore be required to pa7 sone quantity of gold to the: TNT in proportion to the incre ase in its drawing rights with that institution. As the article you quote notes, loamy 4.ations with suk.stantial gold holdings, including the United States, will pay out of their existing gold reserves and recei v in exchange an equivalent re, zerve asset in the fore of the gold tranche drawing rihts. other countries which do not hold sufficient gold, or an is the case with Japan, hold relatively snail amounts in relation to their total reservas mav seek to buy the gold they need to pay to the IF from the United States or others. The overall amount of t4e quota incr.-stasc,4 has not yet been finally deternim.1 but is expected to be somewhat above 30 percent. If this is the case, the 25 percent gold portion could be as high am 41.8 billi on for all nations of which the secondary effect on the U. S. could well be above $500 million in tho absence of special provisions to avoid such a drain on U. S. gold.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  In fact, however, it is fully expected that techniquos will be adopted to avoid such a drain on the United States or other reserve countriea. In my testimony last Friday before the Sw)-committee on International Lxchange and Payments of the joint Economic comittas, I dealt with this suhject. I am enclosing a copy of ay statement and note that the question you raise is specifically discussed on pages 11-13. I hone this inforwation will clarify for you the references you have seen in the press as to possible Japanese gold purchases. sincerely:  Paul A. Voleter  The Fonorable Jamas A. McClure Hones of Represemtatives Washington, D. C. 20515 Enclosure  OASIA:TPNelson:EB  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  11/17/69  October 31, 1969 THE SECRETARY B. K. M4cLaury Atteched Letter  At the suggestion of Congressional Liaison, I have prepared the attached letter for your signature to Sill Ayres, minority member of the House Veterans Affairs' Committee. He was instrumental in killing the suggestion for investment of trust funds in VA mortgages last spring, and we are asking him to try to do the same egsin. You may recell that John Fhrlichman feared that H.R. 9476, incorporating this proposal, would be cleared and easily pass the House. I have heard the same comment from other sources. I hope this letter helps.  Recommendation:  MacLaury   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Smith  That you sign this letter.  Ex.Sec.  NOV 3- 1969 User Mr. Ayres: I an writing to you is regard to 11.11. 9476, a bill To increase the availability of guaranteed home loan financing for votaress and to increase the income of the national service life insurance fund.' I understand that the Committee on Veterans Affairs is reconsidering this bill despite its rejection as recently as May of this year. I believe that that earlier rejection was based on sound reasons, and that those reasons remain as stron4 or stronger today. It seems to me that the fuadamental issue posed by MA4 9476 is whether the Congress is willing to face up to the hard choices that must be made among the many pressing needs for funds through the regular authorisation-appropriations process, or whether instead it intends to increase Federal outlays, in this case in support of VA guaranteed mortgages, through the backdoor. Under the unified budget, as you know, trust fund acquisitions of VA guaranteed mortgages would constitute budget outlays, and I an convinced that this is the proper treetmemt if we are to have a measure of the over-all economic and fissecial thrust of the Federal budget. After all, there would be a one-for-one impact on the financial markets for each dollar shifted into such mortgages, since the Treasury would have to raise now funds to replace the special issues now held by the trust accounts. In current circumstances, I feel strongly that if we are going to authorise additional bud4ot spending in one area, we most find ways of reducing outlays even further in other areas. The President has stated on several occasions that he intends to adhere to a canine, of $192.9 billion of expenditures in order to slow inflationary pressures in our economy. VA insurance reserves are not ''frels dollars, they cannot be used to acquire VA guaranteed mortgages without at the same time requiring a dollar for dollar reduction in other programa. This is why I feel that the Congress should have the opportunity, through the regular appropriations procedure, to consider haw Federal budget support of VA guaranteed mortgages fits into the over-all fiscal posture of the Federal Government this year.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  am also concerned that if the Congress approves the use of trust fund monies for the acquisition of VA mortgages, it will be increasingly difficult to resist pressures to finance other, perhaps equally pressing, programs by the same, seemingly painless, means. This could quickly become an exercise in self-delusion. Having stated my opposition to the use of trust fund assets to finance particular programs, however worthy, let me quickly add that I fully shore the Committee's concern over the limited availability of •mortgage funds in the present environment. For this reason, a number of specific steps have been taken to help support home construction. Orerating directly to maintain a flow of money into housing, the Homo Loan Banks have very substantially stepped up their volume of their advamces to member savings and loan associations. In fact, total Hose LOWI Bank borrowings have increased by over $2 billion since June 30. Similarly, the federal National Mortgage Association has been making new commitments at a rate of roughly $10 billion per year, or about three-fourths of the entire volume of FHA and VA mortgages originated. Last month, ?resident Nixon ammounced a sharp cutback in Federal construction projects, which should also help to relieve pressures on construction resources. In addition, as you know, the Administration has proposed in the Tax Worm Bill a special tax credit that ye believe can help stimulate institutional home mortgage loading and other socially desirable typos of lending over the longer run. Finally, the Government National Mortgage Association is expected to coamit some $650 million of special assistance funds to multi-family housing units in cooperation with the Federal National Mortgage Association in a so-called tandem plan. While these measures are not all aimed specifically at providing mortgage funds to veterans, they are intended to provide strons support for the flow of mortgage credit generally, and thus help cushion the effects of tight money on home building. I must emphasize, however, that the only effective means of assuring an ddequate flow of mortgage funds to veterans and others in mood of housing finance is to continue to exercise the budgetary and monetary restraint necessary to assure that the ecemmmy returns to a path of stable growth.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I have not stressed some of the other concerns which we have with H.11.. 9476 because I feel that the budgetary concern is fundamental. But this legislation also raises a number of questions with regard to the over-all standards applying to the exercise of fiduciary responsibilities for the investment of these funds. 1 shall appreciate your continuing assistance in making knows to your collealues the co6ent reasons for rejecting this proposal. sincerely,  Utvit.  The Honorable William R. Ayres House of Representatives 2367 House Office BuildinWashington, D. C.  EPSnyder/ BKMAcLaury:lm 10/31/69   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  georierlsk,-  AUG  3 1969  THE DEPARTMENT OF THE TREASURY  DATE TO  8/13/69  Mr. Volcker  As requested.  B.K.M.  Bruce K. MacLaury Deputy Under Secretary for Monetary Affairs 3321 DigitizedRom for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Ext. 5848  DRAFT--BKMacLaury:lm:8/12/69 Letter to Mr. William Fellner at Yale for Mr. Volcker's signature  I have been mulling over your letter of July 22 before attempting a reply.  First I want to thank you for setting  your thoughts down on paper -- it is most helpful to have ideas on complex subjects in black and white. The fact is that our advocacy of a sizable SDR activation was not based on the kinds of assumptions that you set forth. I am enclosing a copy of my statement oP August 6 before the House Subcommittee on International Finance,  Where I outlined I  on pages 7 through 10 the major con:gilt-ions that went into our recent negotiating position on SDR's.  Some of the arithmetic  that is only hinted at in that statement led me to the conclusion that there was in fact a strong case for a substantial start on reserve creation.  Indeed, I believe that that arithmetic  was more persuasive in overcoming the reluctance of our European partners to sizable activation than any other single factor.  I  think it is also true that SDR activation presented participants in the Group of Ten deliberations with the potential for positive joint action on which they could agree, at a time when market uncertainties called for such action.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2 Turning to your specific assumptions, I see no reason to postulate the introduction of discriminatory measures against dollar inflows to justify the need for a substantial amount of SDR activation.  The arithmetic to which I referred above  indicates that (1) the growth of reserves was by no means keeping even approximate pace with the growth of trade and investment in recent years; (2) what growth had occurred in reserves was largely accounted for by crisis credits rather than permanent additions to reserves; and (3) it was unacceptable that the dollar continue to provide the bulk of reserve growth in the future.  Clearly, if one rejects this last point,  assuming instead that the world should be happy to thrive on the dollar standard, there is little rationale for SDR's.  In  my view this is not the case. Your second assumption I find more arguable.  It is of  course possible that by creating a meaningful amount of SDR's, we shall have diminished the appetite of the world's monetary authorities for dollars.  But frankly,  I doubt that there will be a one-for-one offset of SDR's against potential dollar holdings.  There are a number of  other factors that are more lilely to curb our ability to finance deficits through increases in foreign official dollar holdings than the availability of SDR's as an alternative reserve asset.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I assure you this belief is not  3  founded on the subtle "swamping" theory that makes dollars look good by comparison with over-abundant SDR's. I am sure there will be differences of opinion concerning the role and scope for SDR's in the international financial system.  Nevertheless, I believe we have taken a significant  further step forward through the agreement to implement this new mechanism for adding to international reserves. With best regards, Sincerely yours,  Paul A. Volcker  Mr. William Fellner Sterling Professor of Economics Department of Economics 37 Hillhouse Avenue Box 1972 Yale Station Yale University New Haven, Connecticut Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  JUL 2 3 1969  Yale University New Haven, Connecticut DEPARTMENT OF ECONOMICS 37 Hillhouse Avenue Box 1972 Yale Station WILLIAM FELLNER,Sterling Professor  of Economics  July 22, 1969  The Honorable Paul A. Volcker Under Secretary of the Treasury for Monetary Affairs Washington, D. C. Dear Paul: I take the liberty of writing to you in a matter that I discussed some time ago with Henry Wallich (who, I think, has some misgivings about my views in this regard), and which I discussed more recently with Milton Friedman (who had convictions similar to mine long before I talked to him). I concluded that it is more straightforward if I write to you also directly. Furthermore, an argument has better chances of receiving consideration if those advancing it accept the responsibility of putting it down in writing. If what can be read in the American and European papers is not wholly misleading, the United States is currently making an effort to raise the coming SDR distributions beyond the level appearing desirable to some of the most important European countries. It seems to me that this is a position implying the following two assumptions, both of which would have to be simultaneously satisfied. I believe these assumptions to be unrealistic. If the SDR distributions were not raised to the high level Assumption I. advocated by ourselves and probably by the United Kingdom, some of the major countries would introduce discriminatory measures of various sorts for reducing the dollar inflow into their economies. According to this assumption they would do so in view of the size of our presumptive dollar supply to the rest of the world; and they would do so either instead of, or in addition to, allowing the exchange rates of their currencies to rise in relation to the dollar. These discriminatory measures for keeping dollars out would therefore presumably apply to what one might call nontrade dollars. Assumption II. If the total SDR distribution became as large as we allegedly would like to have it, then the critical amount of dollar supply beyond which countries would adopt these discriminatory measures would either remain unchanged or would become reduced by very little, that is, by appreciably less than the equivalent of our SDR quota. So our SDR quota in a large total would give us a net gain, so to speak.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Paul A. Volcker  page 2.  As for Assumption I, it seems distinctly implausible to me that, given the size of our prospective dollar supply to the rest of the world, the discriminatory measures in question would be adopted. Indeed, I have a very hard time visualizing effective measures of this sort, I mean measures of significance which any of the countries under consideration could make effective for any length of time. While here and abroad I repeatedly asked informed people what in particular these measures would be, I invariably received evasive and incoherent answers, except when the person whom I asked answered that in his opinion there existed no feasible measures that would be "promising" in that sense. Turning now to Assumption II -- i.e., to the second assumption given Assumption I, merely for the sake of argument -- this seems very unconvincing to me, unless SDR's will rather generally come to be considered unattractive assets. Unless this should prove to be the case, I would expect a significant lowering of the critical amount of dollar supply at which adopting the "defensive discriminatory measures" would become tempting to policy makers abroad (provided that effective measures along the lines of Assumption I were feasible at all). The underscored unless in the preceding paragraph leaves a possibility open. This is the possibility that by a "swamping" of various foreign official institutions with SDRs (the obligatory acceptability of which by the surplus countries is of course limited), the desirability of the new instrument will be greatly reduced and the desirability of dollar reserves will be increased. Yet to insist on raising the SDR distributions with this possibility in mind would surely be an unnecessarily roundabout way of trying to strengthen the dollar, and I feel convinced that the American position is not based on these considerations. I apologize once more for taking your time with this letter, but as I said, I feel that the argument, of which I am by no means the only advocate, deserves to be called to your attention. I remain, with the expression of my regards, Very sincerely yours,  /c   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  William Fellner  404/9nV 0I   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  "crigaR 0/1/ N311A/V aAo Si VIS a54,11(1 maN 3Aiii vmv unidiv)timo$1 vael73,.4 14/06 A09 WO I14 v1A/vA//,4 *304 Vociti 'b V' 1 A/005 SW .3517"3-V I s' 43H ssysalci 9 sw  • sw  cryaki"1#0-1s).tdisit3S1,111a SS% 0. 113,W V al 001 )'o'dVWVt  dffikieA/dr a 1 /14/  'sail * * kJraxcoci  qz4.44  Aimsm F/ We0 g_c )eop a/S 0411 aYod131014 14/ 1 WwocYA °A/- ARA/oa ON ampfi4s - 40A/N apioN oN (Yoati dan/..4ism LLMQ X?5g3to Doyj(11314 Yo chi evsla 4).4 Aallo w g I SI W° tiOfici >19°4 .I.LiaNail Aillistbosi 'So ç 14•0 ;.4OWVSfl j3Ai38 Iii)sossiwas•01 wotyAAallowoorj s 8 S 1 d a4A/ a4 41. 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PooleC y 0 Fitit.WAR k T. c THE STATE St/YATS P RES/4ENT Fes4 VT — STATE SEJY, rAANK,X ./k ierofforr,(F) C5 r LfrvioN — Co vIrt Aont AlkeSS of STAT St/YATE. ilAssAc11u.S€175 ST. LiesTrieLJ 5.070?0 TE.Liafilous eNa- SEN. An0e4/90Ttgoole. No iN.LP  verry  No/N.LP Viotti STATE SSA/ATMS or No A.5.5%.5 T/wce, Ft40, 1 STATE. SEAM Tots  4  WON p,yo/fUJrAvi nti.S. Rel*R4tS MTAT\ Vt. Ron — Net.)TE4Sey Pos4 LP fkoisi ply u bs RtP oStP11,G /9/A0514,(D) OF Hum sr",cT Of So% MA #1/ ST , otiviGe N ZY, NofitLP AND No A ssisr/wce, Pook NE.L.P13064NELPFton fl`f JS. RtftRfSeirTATive. iN 14)AsHm/Groiv,Ds. rgon  t,  -t E L fo4cetxu• 6113 tyt34-e1iek NO2/ gatt(r) eantS•C Te Res/MN C A rtioL IAA i'kPoo1 WHI1M7,C , 14'CIT/2--(N — YES. fLtASc. \A..115.,HELPItELP Te4,ç To /1 E Soy TA v6/74?, 'ES.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Pta i it oxs  iteA cr-of   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  August 6, 1969  Dear Mr. Porcello: Thank you for your letter of August 1 with respect to your need for welfare assistance. Aq you know, I have asked Congressman Rodino, who is more familiar than I with the various forms of assistance that may be available to residents of Essex County, to make some inquiries on your behalf. I am sure you will be hearing either from him or from someone on his behalf in the near future. In the meantime, I am returning the correspondence you enclosed with your letter of August 1, which you will want ID keep for your awn records. I am sure that you understand the Treasury Department is unable to provide assistance directly to you, and I can only suggest you follow your contacts with local welfare offices. Sincerely yours,  Paul A. Volcker  Mr. Michael Porcello, Jr. P. 0. Box 6113 Neward, N.-m Jersey 07106 Enclosures  fl  PAut. IA VoLc Krg.‘1/4/0ER .S.t.c.AT.144r rot /9041-7-4er FFA OS of t(S. Tgetisv , r, i/ivcilpar  fYo H EA-PN0/nil)fk  .set F04,7 r. %.sSeKc LiArr Y Opt-F/  D‘sAeth Lay fie/yr or 0 noNey  PooA *FS STANCE /t/Y4Pocm° FINA/K/AL HELP -s olve rwor6,0 ro /1, E — 1 Go A Aiep lifeWo F04 14)ELFA RE. Pool( AS .5 ISTII/YCe Roel tsseK co %/4er rt.%) L FARE fa if -  Ms( FiffiA&CiA L /f.Lfl r04 YNEE4S. un/De4SociALitcv•fiTyMsAaiLiTrae/Yerir L Tr Oe/yeni- YEs. 1$T 190 reo/P7 soc SEc vg tiNOe.SSeX Coimerria.L.FiVE 1)% s40%  gry8fiver'T  YES  PoR HELP fgon i•JtA.F,14/S Tift foo, 6eme ri IS fko/1 v41trEZ5r4TES-  tl KANO /if Erov e  tvins/y7- PU.ASS NSW/E.  i/v4PYE ED0Otte  TN%$‘s A Pocyt Soc.s eT r Fog 604 HAMA ‘‘A,PeamEeic/i/r. c Tizcis/Fo4 Poo4Pe0Pt?Qv grr  Poo4 F404 Eovtd/V/',E.vrro,f, 1yDI5,1,g Li TyBe/yeFir 10.1 MY NtI.OS A 000 AC/YenT Fkomehe,"c HAEL Po4ceLLo.T/f  . hox t3."7  /13  14i.fic N. po).cenAtkAct-i•JNIere, RorowcArlycot...1c Yes, NA  IA'IA P004 11.1 kttere AortA‘cArtCaile/Y/N Po veer y. p PASliELfifELP hie.Lfit7E  pLA.Assueto p /*IE. P.S e p Le/iS E.OR% Te aeAcK Tor/ soo.K mit‘p/ro•   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11111111  tell einkson  1vk.r1, p6A C Ek.k..e•  Leif enikson  P.0•SoK 44//3  LI)AtK N.7.0,/o‘ ot,  Nat.0 STA rtS Dt PAtreitNto f IRe4swt y office. oF THE. ti Nang SEt4tTAO off/cc MR .PALAw. A.Vot.c‘ie4NOR Stcgt.TARY foR tioNevity A F F/1/41S or u s . iktAsug y. utibt,4 Ss.cAtiMy oFF/ce.. WAS /N6riwy D  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  adviA Poo  TeAllitkieliNc tli  ViMPoYfJY,  1  THE UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS WASHINGTON. D.C. 20220  July 28, 1969  Dear Mr. Rodino: I enclose another letter I have received from Mr. Michael Porcello, Jr., of Newark, New Jersey, who is seeking welfare assistance. Sincerely,  Paul A. Volcker  The Honorable Peter W. Rodino, Jr. U. S. House of Representatives Washington, D. C. 20515  Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  M PAO-, A tV0%.c.K•ei  SEC/(ST#1 AY oF  JUL 2 E  'ZS Jle LY/94f tlYSocIALs.cairy  rf\  V  ,  -  FE? LI. /y(efihts toif 6-64,Ti  S. E,Y\ING-F04 F/NA/C  czir/o/r -  L ASS t TA/Mt .  AtIrtse cm/ccravy yts No /1044ff H,'1 ye No t4ch c/ti 770/y - No. — No , ViAve No HoME -/vo , Ala ALPNo 1./E.LPFte0/1SS ex co v4rof WEAN FA/et — nY01 I LIT y enienT $ s S /book — eooR 110/v y F40/1 ers Ye/e WiTf../VT- foA /YeeDS • pooA ASS iSTAfite AN4 P004 AL ASS .5 TANce FO'/ ESSEX covirrY Wt.LiAie*. bey NELJAR K N. AA A HA/vs  Ms Is A ecto4 Soc,i T yr* poo4 )iA/1601 CV7/42.t/y FDA 404 P eof / (0 v  PPee Aftisif c/i/v —  STATES" mt. MO Pr(PloTHeif PooR 6e4eF/rs riZom cfHEIR - 1/11/IvN v0E/le/yr P tidi 171E-LP/PIC 11  rwoi  Ac PoAcseLLD. tiox,04//2 1 Ne4411RIS ry.T. o7ioC filealer? 91-4-t-Ld PaYealet  A  1,1 irt  R omiew AAPatirR W ft at Amete% ciivy ce TyleN N povegT Y, &stLVIS iit•‘..PfriSLP n'. PS. PLV1St WkIrt 6/9 cli(70fr2E,Soo/v•MiTLIL /fa-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  m i Pox ct.t.Lo P.0. 60X # //3 INAAJAR  QA/ITtoo sTArLs Dtmevn.NT or TR.4.51../4t. off/cf. 0F E. Ni0e scgITAAY oft .VA.cceR,UND€A Sec/Mr/MY FoR floiniARY AFFIKS , or \•45, ThEAStiO • uteDER1 StatiVI/eY oFF/ce * WASH//V‘To/y. c  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  z/v9A foo4 \.3 i-1  Arlt4tvw i  N 0 Orr,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  July 21, 1969  Dear Mt. Rodino: A member of your staff indicated to a member of mine that you receive ineuiries such as that in the enclosed letter from Michael Porcello, of Newark, and that your office might be able to direct him to a welfare agency that might be able to assist him in some way. I am unfortunately not sufficiently familiar with the various forms of welfare available in New Jersey to know where to direct Mr. Porcello, and I will appreciate anything that your office can do to help him. I enjoyed talking with you the other day. Sincerely,  AZisned) Faa, Paul A. Volcker  The Honorable Peter W. Rodino, Jr. U. S. House of Representatives Washington, D. C. 20515  Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  July 21, 1969  Dear Mk. Porcello: I have your letter of July 15 and am sorry you and your Mother are having difficulty. I am not sufficiently familiar with the various agencies in New Jersey designed to give assistance in situations like yours to know where to direct you but have asked Congressman Rodin°, of New Jersey, to see if his office can put you in touch with someone who might help you. Sincerely yours, Signoly,Taka  (  Paul A. Volcker  Mk. Michael Porcello, Jr. P. 0. Box 6113 Newark New Jersey 07106  Vo  AUG 1 1 1969 UNIVERSITY Oy  innuota, DEPARTMENT OF ECONOMICS 1035 BUSINESS ADMINISTRATION BUILDING • MINNEAPOLIS, MINNESOTA 55455  August 8, 1969  The Honorable Paul Volcker Under Secretary of the Treasury for Monetary Affairs Department of the Treasury Washington, D.C. 20220 Dear Paul: From September 6 to September 19, I will be making a quick economic survey tour in western Europe, spending a couple of days in London (where I already have a luncheon date with Roy Jenkins), then a couple in Paris (where I expect to see Giscard, among others), then Brussels, Bonn, Frankfurt, and possibly Switzerland or Rome. Given the uncertainties, fears, and expectations about the mark, franc, and pound, this should be a particularly interesting time for this kind of round-up. If I can be helpful to the U.S. cause in any way -- as eyes, ears, or even cat's paw -- please let me know. Partisanship, after all, stops at the water's edge. But perhaps the Europeans don't know this, so I may be in a particularly favorable position to get some frank reactions and views on matters of international economic concern. By the way, congratulations on the SDR's -- what you are getting exceeds even my optimistic-realistic expectations! With  a  regards,  Walter W. Heller MATH:dg  v3L.k.‘.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4v4...  y it.)44•. ior A..  ckr , k v-Nw.  1444ACR1  V44/4W/C 4 &Ark(  /WC  Dear Senator rllender. In your letter  of :July 10, you asJ(ed for my cormen ts on questions raised by Mr. :;oyer N, Winters with respect to increasin g the price of monetary gold.  First of all, I would like to corr (;ct several nisconceptions on which Mr. Winters bas es his views. The liquid loners held by foreign monetary authorities, the only institutions eligible to buy gol d froni the United States, amounted to $11.8 billiaa of ‘.hi ch the Interaational impnetary rund held $1,031 millio n, conpared to the total liquid liabilities of $35 millio n at tht; end of ;arch. I air enclosing, for his informatior, a copy of a table which appears monthly in the Treasu ry Bulletin !\lso it is not correct that most Luroi,ean governments are pressing for an increase in the price of gold and opposecl to issuance of other than a very splall amount of &DR. No European govermant has presse d the United Staten to revalue gold anC the preliminary disou9sio ns to date indicate both a willingness and desire on their wart to considg7tr a meaningful issuance of SUR. In this save connection it sho uld be noted that it would be quite inconsistent for one to advocate a large increase in the price of gold, a tripli ng as Mr. Winters suggests, that would add some additional $80 billion of liquidity to international reserves at one str oke and yet be concerned over an orderly and controlled annual issuance of SDR. The Administration's view with respect to an increase in the ?rice of gold is, I aie sure, well-known to you. Secretary Kennedy, /ith the app roval of the Presiaent, has said that we zee no need cr rea son for such action and will not seek an answer to our rob lens by a change in the Llonetar y price of gold. I have also ,Aoi nted out in my testimony before the Joint Lconovic Corzittue that we could not escape the basic proLaeus that confront us of achieving a better adjust rent process, an ordrly growth of liquidity or sustaining confidence in the dollar by incr easing,/ the price of gold.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  We believe that early action to inaugurate use of GDR is the best way to _eet the liquidity problen. This method allows not only an orderly increase in livuidity but an equitable 4istribution of the liquidity crqated. an the other hand, meeting liquidity needs throug4 an increase in the gold price would result in a Tvfost inequitable distribution, benefiting the countries with large gold production and those that save bought and held a high ratio of gold to foreiqn exchange in their reserves, while penalizing Close countries that have placed confidence in the dollar and held a high ratio of foreign exchange to gold. Siimetely yours,  (Signed) Paul A. Volcker Paul The Honorable Allen J. Ellender United States Senate Washinoton, D. C, 20510 Enclosure  OASIAATNelsonEB  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7/23/69  Volcker  itnle  969  85 INTERNATIONAL FINANCIAL STATISTICS Table 2. - U.S. Liquid Liabilities to Foreigners (In millions of dollars)  Total liquid liabilities to all foreigners  End of calendar rear or month  1957 1958 1959 1960V  1961 V........... 1962  g/  1964 gi  Total  Gold deposit I/  Gold investment 2/  Liabilities to foreign countries Banks and other foreigners  Official institutions //  Total  Shortterm liabilities reported by banks in U.S.  15,825 2/ 16,845 2/ 19,428 20,994 21,027  200 200 500 800 800  200 200 500 800 800  7,917 8,665 10,120 9,154 11,078' 10,212 10,212 11,088  22,853 22,936  800 800  800 800  11,830 11,830  : r 24,068 24,068  800 800  800 800  26,361 26,322  800 800  28,951 29,002  800 800  1(  1963 g/  Liabilities to International Monetary Fund ari ing from gold transactions  Marketable U.S. Gov't bonds and notes  Non marketable convertible U.S Treasury bonds and notes  Total  n.a.  Liabilities to nonmonetary international and regional organizations j/  Shortterm liabilities reported by banks in U.S.  Marketable U.S. Gov't bonds and notes  5,724  n.a.  n.a.  n.a.  n.a.  Total  Shortterm liabilities reported by banks in U.S. i)/  Marketable U.S. Gov't bonds and notes n a.  n.a. n.a. 966 866 876  7,618 7,591 7,598  '5 7 7,E 7,048  541 543 550  1,190 1,525 '1,541  542 552 530 750 750  10,940 10,940  890 890  8,275 8,357  7,759 7,841  516 516  1,948 1,949  703 704  1,245 1,245  12,748 12,714  11,997 11,963  751 751  8,359 8,359  7,911 7,911  448 448  2,161 2,195  1,250 1,284  911 911  800 800  14,387 14,353  12,467 12,467  1,217 1,183  703 703  9,214 9,204  8,863 ,863  351 341  1,960 1,965  808 808  1,152 1,157  800 800  15,428 15,424  13,224 13,220  1,125 1,125  1,079 1,079  11,001 11,056  376 376  1,722 1,722  818 818  904 904  n.a. n.a.  n.a.  18 0: : 10,680  n.a.  660 775 791  29,115  834  34  800  15,372  13,066  1,105  1,201  11,478  11,006  472  1,431  679  752  1966 V  . 29,904 29,779  1,011 1,011  211 211  800 800  13,600 13,655  12,484 12,539  860 860  256 256  14,387 14,208  13,859 13,680  528 528  906 905  581 580  325 325  1967 V  [33,271 33,119r  1,033 1,033  233 233  800 800  15,653 15,646  14,034 14,027  908 908  711 711  15,894 15,763r  15,336 15,205r  558 558  691 677r  487  204 204  1968 V  (33,906r 33,692r  1,030 1,030  230 230  800 800  12,549r 11,319r 12,482r 11,319r  529 462  701 701  19,587r 19,443r  18,978r 18,978r  609 465  740r 737r  698r 698r  42 39  32,482r 32,988r 33,150r 32,574r  1,041 1,045 1,047 1,030  241 245 247 230  800 800 800 800  14,280r 14,374r 13,615r 12,101r  12,920r 13,014r 12,247r 10,'733r  549 549 557 557  811 811 811 811  16,405r 16,745r 17,867r 1,8,773r  15,801r 16,133r 17,257r 1,8,160r  604 612 610 613  756r 824r 621r 670r  551r 619r 4542 504r  205 205 167 166  33,152r 33,603r 33,576r 33,973r 35,602r  1,030 1,030 1,030 1,030 1,030  230 230 230 230 230  800 800 800 800 800  12,608r 12,437r 12,063r 12,136r 13,688r  11,239r 11,155r 10,770r 10,843r 12,397r  557 520 531 531 529  812 762 762 762 762  18,755r 19,381r 19,794r 20,035r 20,116r  18,128r 18,745r 19,I68r 19,415r 19,492r  627 636 626 620 624  759r 755r 689r 772r 768r  599r 595r 613r 704r 700r  160 160 76 68 68  33,906r 33,692r  1,030 1,030  230 230  800 800  12,549r 11,319r 14482r 11,319r  529 462  701 701  19,587r 19,443r  18,978r 18,978r  609 465  698r 698r  42 39  33,777r 34,405 35,056  1,031 1,031 1,031  231 231 231  800 800 800  10,728r 10;779 10,V75  462 459 459  701 676 676  21,9  20,837r 21,439 22,106  494 502 495  740r 737r 687r 654 649  647r 616 611  40 38 38  1965  1968-March April May June July August September October Novembe, . December 1969-January. February March p  v._  (  9,565r 9,644 9,640  Note: Table is based on Treasury Department data and on data reported to the Treasury Department by banks and brokers in the United States. Data correspond to statistics following in this section and in the "Capital Movements" section, except for minor rounding differences. Table excludes International Monetary Fund "holdings of dollars," and holdings of U.S. Treasury letters of credit and nonnegotiable, noninterest-bearing special U.S. notes held by other international and regional orgabizationn. The liabilition f]guren ern used by the Department of Commerce in the statintics measuring the balance of international payments of the United States on the liquidity basis; however, the balance-of-payments statistics include certain adjustments to Treasury data prior to 1963 and some rounding differences, and may differ because of varying timing in incorporating revisions of Treasury data. The table does not include certain nonliquid liabilities to foreign official institutions which enter into the calculation of the official reserve transactions balance by the Department of Commerce. I/ Represents liability on gold deposited by the International Monetary Fund to mitigate the impact on the U.S. gold stock of foreign purchases for the purpose of making gold subscriptions to the Fund under quota n.a. increases. 2/ U.S. Government obligations at cost value and funds awaiting investment obtained from proceeds of sales of gold by the International Monetary Fund to the United States to acquire income-earning assets. Upon termination of investment, the same quantity of gold can be Digitized reacquired for FRASERby the International Monetary Fund.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  til  L3/  21,331r t  473r  Includes Bank for International Settlements and European Fund. Derived by applying reported transactions to benchmark data; breakdown of transactions by type of holder estimated 1960-1963. Includes securities issued by corporations and other agencies of the United States Government, which are guaranteed by the United States. Principally the International Bank for Reconstruction and Development and the Inter-American Development Bank. Ineluden difference between cont value and face value of securities in IMF gold Investment account. Liabilities data reported to the Treasury include the face value of these securities, but in this table the cost value of the securities is included under "Gold investment." The difference, which amounted to $34 million as of the end of 196S, is included in this column. Includes total foreign holdings of U.S. Government bonds and notes, for which breakdown by type of holder is not available. Data on the two lines shown for this date differ because of changes in reporting coverage. Figures on the first line are comparable in coverage to those shown for the preceding date; figures on the second line are comparable to those shown for the following date. Not available. Revised. r Preliminary.  JUDICIARY COMMITTEE  PETER W. RODINO, JR. 10TH DISTRICT. NEW JERSEY DISTRICT OFFICE: COMMERCE COURT BUILDING 10 COMMERCE COURT NEWARK, NEW JERSEY 07102  SUBCOMMITTEES: ANTITRUST IMMIGRATION AND NATURALIZATION  CongresW of tbe  TEL: MARKET 3-7362  niteb 'tate  lbouoe of ileprefSentatibez 111a bington, ID. C.  JOINT COMMITTEE ON IMMIGRATION AND NATIONALITY POLICY ASSISTANT MAJORITY WHIP DELEGATE TO NORTH ATLANTIC ASSEMBLY  July 30, 1969  Honorable P u A. Volcker Under Secret ry of the Treasury for Monetary Affairs Washington, D.C. 20220 Dear Paul: Many thanks for forwarding correspondence from Mr. Michael Porcello. I've taken the matter up with the appropriate officials and I appreciate your having brought it to my attention. Warm regards. Sincerely,  PETER W. RODINO, JR., M.C. PWR:ljd   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Dear Hans: Thanks for the letter. if I possibly can.  I will make it  Had a good report from  Dewey. Sincerely,  Prgrifffe-er riu-1 Paul A. Volcker  Mr. Hans A. Widenmann Loeb, Rhoades & Company 42 Wall Street New York, New York 10005   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  JUL 2 2 1969 LOEB,RHOADES & CO. FORTY TWO WALL STREET NEW YORK, N.Y. 10005 TELEPHONE 530-4000  /9„4AAA r;iU7/61  July 17, 1969  Mr. Paul A. Volcker, Jr. Undersecretary for Monetary Affairs United States Treasury Department 15th St. and Pennsylvania Ave. N.W. Washington, D.C.  lAkikt 51wtl,  Dear Paul: Not only I, but the entire Wednesday Luncheon Group, was sorry that you couldn't join us at Mantoloking yesterday. We had a delightful day and a lively off-the-record discussion of the many problems confronting the country. As I indicated previously, we will have a second one of these get togethers at the shos2_222..t , wat Vith and I very much hope that you will be Ale to join us at that time. In addition to our New York regulars, I am again also inviting Dewey Daane and Ralph Yo,ng. Paul McCracken unfortunately is already committed. You don't have to decide now. Come at the last minute if you can manage With warm regards. Sincerely,  haw/is  Pitd'evt   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AIR MAIL  July 7, 1969  Dear Bob: I like the economics, glib or not.  But from  the vantage point of a fight on the surtax, the practical possibilities seem to me dim to say the least.  Use of the social security system implies  regressivity that would send my liberal Democratic friends even further up the wall. Sincerely, :(sipea) Y'111  Paul A. Volcker  Mr. Bob Wuliger Hessenkolleg 62 Wiesbaden, Germany Welfenstrasse 10  JUN ' 4 b 1444 21 June 1969 Hessenkolleg 62 Wiesbaden, Germany Welfenstrasse 10 Dear Paul, I hope you won't mind my thong just one more idea at you. It is forced savings. I i:rn sure you can't sell the American people forced savings such, but perh ..ps they can be forced to save indirectly. I think of manipulation of the social security s7stem. If p47montt could be increased /-1(1 the resulting increase frozen .._ say in17o some sort of amortization of the total fund, or into a sterilized sinking fund against future outlay, or some other such method of keeping the Purchasing power out of circulation -- then there 7.ould be a quantity of purchasiT power removed from the scene. This quantity could be held •ginst, say, a period of deflation, when it could be released into increased social security outlay. Such an outlay would give the recipients a relative purchasing advantage, as well as Provide sons anti-deflationary sttmulus to the economy. A provision could be made for frozen funds to be released to next-of-kin, in cases -here the recipients died before their share 7as able to be released as, say, an anti-deflationary measure. Of course, my idea is very "'Keynesian," that is, glib and superficial .:nd doctrinaire, and I ,7ould be ashamed to offer it except that we are living in a "Keynesian° myth,',Ind I suP -,2ose that much as one may dislike the terms of the myth, ho is obligated to recognize it. Bck in 1936-37, the conservative economists were alreLdy pointing out that the trouble with the "Keynesian" game was that it inflated much more willingly than it would deflate. Perh,Ps the broad use of some variation of ,J1 idea such as I suggest 7ou1l make it possible to .poly a little reverse elasticity to the "Keynesian" rubber-band. Of course, I am assuming a willingness and good sense in politici,ms, to allow measures like. mine, which, if it existed in the firt olace, -Tould rilJce such measures unnecessary. But ma* there is mmethilg  here which you can use.  Lots of luck .nd thanks for your letter. Sincerely, -) Bob Wuliger ' f 0.1 -.04040-01v er7  66Civn  C shie r America APO NY   https://fraser.stlouisfed.org L Federal Reserve Bank of St. Louis  u A1: 76 Ac x,(M-A rt -Pk . ,, L (4-- L9"°14') U)). 0` : ' i.A MN eimmigg'.14.---  e •  juN  n  June 25, 1969  The Honorable Under Secretary for Monetary Affairs Paul A. Volcker U.S. Department of the Treasury Washington, D.C. Dear Mr. Volcker, I am 17 years old and I collect autographs of famous men. May I please have the honor of addingagur personally signed picture, on which you have written a brief greeting especially for me, to my collection? I realize how busy you are, so I would be extremely grateful to you if you could just write something like "Best Wishes to Jim Havel" on your signed picture and send it to me. I would always treasure such an inscribed item from you. Thank you very much for your time and your kindness in answering my request.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  incerely,  James Havel  June 24, 1969  Dear Mk. Broyhill: Thank you for your letter of June 19, endorsing Russell H. Dorr for appointment to the post of U. S. Executive Director for the International Bank for Reconstruction and Development. I shall see that your letter is brought to Secretary Kennedy's attention, since it will be helpful to him, in reaching a decision, to know of your endorsement of Mr. Dorr.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  Signed) Paul A. Vnlcer  Paul A. Volcker  The Honorable Joel T. Broyhill U. S. House of Representatives Washington, D. C. 20515  JUN 1 e 1969  i;ear Mr. ;..lechIn your paper of Hay 30, entitled 'Intercst on Gold you deal with two proUeml that are of interest to us. One is an increase in monetary reserves to provide a means of meetiny the growing needs for international liquidit y and the other an elerent of limited flexibility in exchange rates. We have explored the question of internationa l liquidity in great depth with other r4e%1;.ers of the into rnational financial community and, a15 a result, the plan for the issuance of Special Drawing Rights is now in procose of ratifica tion and adoption is expected in the near future. We consider this plan for orderly growth and equitable distribution of reserves highly preferable to any increase in the monetary price of gold. iiaving already moved to separate monetary from commodity gold through the introduction of the two-tier gold arranuerent, we believe it would be a retrograde step to reintroduce any link between the two, The second issue, that of exchange rate flexibility in the fom of a crawling peg Mikan would also result from your proposal), has so far been studied priraril y in academic circles. We and others have, however, expressed our willinoness to explore such proposals in order to evaluate the possible contribution they might make toward improveroent in the monetary system. I might note that most of the proposals in this area envisage a constant gold and dollar relat ionshi7, with other currencies movin9 about this center, wher eas your proposal would provide for moveyent of the dollar as well . Since we have taken no position with res')ect to such proi:osals in general, it would be prexature to attempt to he precise &, out details of the various possible mechanism. This aspect does, however raise some doubts in my mind as does the prop osal that the degree and direction of the crawl should be determin ed :,)1( iLterest rate disparities among countries. Mere may be a priwa facie basis for assu:Ang that high interest rate coun tries will be those   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  who currencies should depreciate while low interest rate countries should appreciate, or at least deireciate less, but in practice there may be a number of factors affecting a country's interest rate which would make it an inappropriate criterion for autonatic exchange-rate mover_ent. sincerely yours,  (Signed) Paul A. Volcker Paul A  mr. Janes J. i'.1fach  uASIA.TPNelson:Eil  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6/12/69  Volcker  ,MEMCsalINDIll'il To TNE, June 10, 1969 Paul A. Volcker  Attached is a suggested reply for your signature to Henry Reuss' inquiry about the IMF study on the "Mechanism of Exchange Rate Adjustment," saying you have asked Bill Dale to look into it and reply to Mr. Reuss directly. I have discussed this with Bill and he is prepared to handle the matter, without sending Mr. Reuss a privileged report.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  PAVolcker   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Dear Mk. Reuss: I have your letter of June 9th, inquiring about a reference in the press to a study by the IMF entitled "Mechanism of Exchange Rate Adjustment." I have asked Mr. William Dale, the U. S. Executive Director, to look into this matter and to reply to you directly. Sincerely yours,  The Honorable Henry S. Reuss Chairman, Joint Subcommittee on International Exchange and Payments and Chairman, House International Finance SubCommittee U. S. House of Representatives Washington, D. C. 20515   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  May 27, 1969  Dear Bob: Many thanks for your thought provoking letter.  I wish I could do more about it --  in addition to making use of your thoughts with a few others. Sincerely,  Paul A. Volcker  Dr. R. Wuliger 62 Wiesbaden Hessenkolleg Welfenstrasse 10 Germany  MAY 15i 62 Wiesbaden, Germany Hessenkolleg Welfenstrasse 10 10 May 1969 Dear Paul, The trouble with getting ahead in the world is that one carries barnacles on his hull, such as whimsical old schoolfellows who fancy that they can offer useful advice to the expert. My instinct is to eschew such company, but there is a quarrel between my instinct and my experience; with age, my faith in expertise, like my hair, is growing thin. shall presume to make some comments upon the massive problem Of inflation. Since I have no access to either primary materials or the personalities-cum-politics quantum, what I have So  to say must be loose ,1:nd general.  I hope that it may be useful.  I am going to suggest that the idea of steering the economy by manipulating "aggregate demand" is limited by a static and rather doctrinaire interpretation of what "aggregate demand" means. That is, "aggregate demand" tends to be a shibboleth - a statistical abstraction not sufficiently in harmony with the world it is supposed to represent. I am unable to support my feelings with a full study, and I can only offer evidence taken at random, and hope that it is significant. For instance, in the Thirties, the New Deal pumped up "aggregate demand" to bring on the brief "prosperity" of 1937, which disappeared by 1938. "Aggregate demand" enthusiasts will say that the difficulty was in either insufficient demand or in abandoting it when the going I am going to suggest that the difficulty lay in abstracting "aggregate demand" from its psychological bases and concomitants. got rough.  Popular economic mythology has observed that "war is good for business." It will be observed that the "aggregate demand" tactics which failed in the Thirties succeeded in the Forties and are still succeeding -- to the point of the dangerous inflation. We have been living in war psychoses of one sort or another since 1940. I say "psychoses" because my point is that it is not "aggregate demand" alone which stimulates the economy, but it is aggregate demand in a context of eschatology; it is a common observation that people who see no secure future will overstrain the present - emotionally, economically, politically, and sexually. What we have had for more than two decades is a general super-charging, and not an orderly  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Wuliger  10 May 1969  2.  economic growth, statistics to the contrary notwithstanding, because the statistics do not measure the emotional counterpoint. There is a credo among economists that inflation can be managed to be a straight-line trend, in little, orderly stimulations of, say, 4% a year. I disagree, because inflation is ultimately a function of the aggregate mind, and when a critical point is reached, the aggregate mind will panic, all safeguards notwithstanding.  I submit  that the Western World is somewhere near that panic-point now.  Just  look at the chronic currency crises, the rush of the little man into coins (gold US $5 and $10 coins reached $95 here last week), and the general failure of confidenco in government promises to pay.  The  history of inflations for the last few hundred years inclines me to skepticism of neo-Keynesian hopes. The idea of using various tools such as the rediscount rate, higher taxes, etc., etc. to cool off the economy by reducing "aggregate demand" does not appear to me to recognize, among other factors, structural imbalances and deficiencies that are not going to be harmonized by across-the-board macroeconomics or macrostatistics. I submit that the real inflationary impulses today are (1) the fear of war and atomic annihilation, and (2) governments  the belief that the  of the west, but especially the U.S. government, are  irrevocably committed to supporting a constantly expanding price level, especially in the form of the market for company shares. There is, I beleve, a widespread conviction that the western countries are afraid to let prices seek a natural level, because of political consequences vis-avis the East Bloc.  In short, U.S. economic policy  is the function of Communist political strength (or bluff).  That,  I think, is the belief. There are technical factors, too, and I should not even mention them, because you, and not I, are the expert.  One is the fact that  institutions such as insurance companies, pension trust funds, etc. are now legally permitted to invest in common stocks; (I beleye that this is a fairly recent development, is it not?); the second factor, if I be correctly informed, is that the Roosevelt securities and exchange regulations created an imbalance in shares trading, in favor of the bull side, bx hindering short-selling, so that the hedging 7*-1e function is now rather weak. Fordeconomists and others such as brokerage houses, speculators, fast-profits people, etc., who associate the paper prosperity of stock markets with the real prosperity of a society, this imbalance has been a great favor.  As to my first  point, the big institutions are a considerable factor in the market,  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Wuliger  10 May 1969  3.  the market is a considerable factor in the inflationary mentality, this mentality goes back into the market and into spending, and the dog keeps chasing his tail. If institutions were obligated by law to invest all or most of their funds in fixed-interest obligations, there would be simultaneously a considerable reduction of the speculative fever and a better market for long-term borrowing. If what I think be true, then the East has the West over a barrel. The Russians can push us into inflation through both the waste of resources on useless armaments and standing military forces, and agitation among workers to have higher wages. I doubt if an external enemy is really necessary for the latter activity, for democratic politics seems to be able to supply enough of its own gravediggers. I suppose that any "practical administrator" who would read my ideas would exclaim: "So what should I do or what can I do besides raise taxes, elevate interest rates, hike the rediscount rate, sellrug, bonds, etc.?" I can make only the rather lame answers of the amateur theorist, who thinks in longer terms than may be allowed he practical politician. I would say (1) Get out of the Viet-nam war and take lesser losses now in preference to huge losses later; (2) Try to work out a dltente in general with the East (I wonder if even the Experts would dare say it is possible); (3) Think hard about revamping the laws relating to institutional stock-purchases and to short-selling and to other such imbalancing factors; (4) Begin a massive public-relations program, supported by positive economic measures, to convince the public that prices are expected to go down and not up, and that the world is not coming to an end, and that the business of a rational economy is to produce and exchange, not to "make money" by manipulating pieces of paper. Well, Paul, I hope that you have borne up under this, I hope that I have had something to say that is worth your time, and, if I have not, I hope that the Washington weather (physical and social) XXIX has not yet eroded your humor and bonhomie. Good luck.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  a6 Dr. R. Wuliger  IIIMMEMBE.  M M iiaCt..1121irg-c  Frank Strauss, Civn  M ,  Cashier's Office t.v.  American Arms Hotel  33214r AY rn /P7 C)  C'  APO NY, NY  09633  Mr. Paul Volcker Undersecretary of the Treasury for Monetary Affairs PERSONAL (Please forward, if  The U.S. Treasury Department WASHINGTON  necessary)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  D.C.  ‘_.)  2-20  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  May 20, 1969 The Secretary Paul A. Volcker  Attached for your signature are identical letters to Congressman Henry S. Reuss and Congressman William B. Widnall in reply to their letter of April 23, 1969, with respect to the recent South African drawing on the International Monetary Fund.  PAVolcker  Exec Sec.  Dear Mr. Widnall: I both understand and greatly appreciate the concern you and Congressman Reuss expressed with respect to the recent South African drawing on the International Monetary Fund in your letter of April 23. I also welcome your strong support of the two-tier gold system and your interest in its effective functioning. The drawing by South Africa on the IMF will not, in my opinion, undermine present arrangements in the gold market, and I am glad you agree that the United States should not have objected to this drawing in the gold tranche. We have long supported the concept that gold tranche drawings be virtually automatic, and we continue to believe that no doubt should be cast on the ability of a country to mobilize these funds promptly should it deem a need exists. I am convinced that should experience show that the privilege is being abused by repeated drawings and repayments unrelated to the basic objectives of the IMF, adequate means exist to effectively halt such practices. It is true, with respect to the $50 million portion of the recent drawing representing South Africa's gold trenches that South Africa may, under certain provisions of the Articles of Agreement of the IMF, be able to repay a substantial portion in gold. Indeed, it appears likely that, under the mandatory repayment provision of the Articles, it will be compelled to do so. It is our understanding that the Finance Minister of South Africa, in presenting their IMF transaction to his Parliament, described the mandatory repayment provision of the Articles as the expected means of repayment. Operations under this provision could be undertaken but once a year for a maximum of $50 million of repayment in gold. While the need of South Africa for this drawing   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  NIP  at a time when its gold stock has been rising steadily is not apparent, the amount of gold involved and the potential frequency of the operation do not involve any danger to the two-tier system. Moreover, to the extent South Africa may have merely wished to test and confirm the automaticiLi ty of the gold tranche drawing right, that purpose will have been achieved and the drawing need not imply repetition in the future. Other provisions in the Articles of the IMF would obligate the IMF to accept gold tn repayment only against drawings in the credit trenches. Such a drawing, as you know, is not involved in the present transaction, nor would such a drawing be automatically available. Except for the annual mandatory repayment provision, it is not incumbent upon the IMF to accept repayment in gold for a gold tranche drawing. In a statement made by the Treasury at the time of the South African drawing, we noted that the United States will be observing further developments, not only with respect to this particular drawing but with respect to the consistency of possible further transactions with the broader objectives a the IMF. As this hmplies, we shall certainly possible future abuses of IMF procedures undermine the effective operation of the gold market. We welcome your support tn see no need for any further statement or part at thts time.  be alert to any in an attempt to two-tier system this regard, but action on our  Sincerely,  Mt honorable William B. Widnall House of Representatives Washington, .'M. 20515 Copy to:  Messrs. Petty, J. Smith, Willis, MacLaury, Nelson and Dale  PAVolcker; TPNelson:WBDale:pjb:5/20/69   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  /9‘7  Dear Mr. Reuss: I both understand and greatly appreciate the concern you and Congressman VAdnall expressed with respect to the recent South African drawing on the Internat tonal Monetary Fund in your letter of April 23. I also welcome your strong support of the two-tier gold system and your interest in its effective functioning. The drawing by South Africa on the IMF will not, in my opinion, undermine present arrangements in the gold market, and I am glad you agree that the United States should not have objected to this drawing in the gold tranche. We have long supported the concept that gold tranche drawings be virtually automatic, and we continue to believe that no doubt should be cast on the ability of a country to mobilize these funds promptly should it deem a need exists. I am convinced that should experience show that the privilege is being abused by repeated drawings and repayments unrelated to the basic objectives of the IMF, adequate means exist to effectively halt such prac,..ices. It is true, with respect to the $50 million portion of the recent drawing representing South Africa's gold trenches that South Africa may, under certain provistons of the Articles of Agreement of the IMF, be able to repay a substantial portion in gold. Indeed, it appears likely that, under the mandatory repayment provision of the Articles, it will be compelled to do so. It is our understanding that the Finance Minister of South Africa, in presenting their IMF transaction to his Parliament, described the mandatory repayment provision of the Articles as the expected means of repayment. Operations under this provision could be undertaken but once a year for a maximum of $50 million of repayment in gold. While the need of South Africa for this drawing   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  NIP  at a time when its gold stock has been rising steadily is not apparent, the amount of gold involved and the potential frequency of the operation do not involve any danger to the two-tier system. Moreover, to the extent South Africa may have merely wished to test and confirm the automaticity of the gold tranche drawing right, that purpose will have been achieved and the drawing need not imply repetition tn the future. Other provisions in the Articles of the IMF would obligate the IMF to accept gold in repayment only against drawings in the credit trenches. Such a drawing, as you know, is not involved tn the present transacton, nor would such a drawing be automatically available. Except for the annual mandatory repayment provision, it is not incumbent upon the IMF to accept repayment in gold for a gold tranche drawing. In a statement made by the Treasury at the time of the South African drawing, we noted that the United States will be observing further developments, not only with respect to this particular drawing but with respect to the consistency of possible further transactions with the broader objectives of the IMF. As this tmplies, we shall certainly possible future abuses of IMF procedures undermine the effective operation of the gold market. We welcome your support in see no need for any further statement or part at this time.  be alert to any in an attempt to two-tier system this regard, but action on our  Sincerely,  /V,6,2-12)/ The Honorable Henry S. Reuss House of Representatives Washington, D. C. 20515 Copy to:  Messrs. Petty, J. Smith, Willis, MacLaury, Nelson and Dale  PAVolcker:TPNelson:WBDale:pjb:5/20/69  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  WRIG.-1"" FATMAN, T,X., CHAIRMAN RICHARD 7.:,DLLING, MO. HALE FOODS, LA. HENRY S. .SUSS, MARTHA W. GRIFFITI-S, MICH. WILLIAM S. MOORHEAD, PA. WILLIAM B. WIDNALL, N.J. DONALD RuMSFELD, ILL. W. E. BROCK 3D, TENN. BARBER B. CoNACLE, JR., N.Y.  CongtO of the Zinittb  tatc5  „JOINT ECONOMIC COMMITTEE (CREATED PURSUANT TO SEC. 5(a) OF PUBLIC LAW 304, 75TH CONGRESS)  JOHN R. STARK, EXECUTIVE DIRECTOR  WASHINGTON, D.C. 20510  WILLIAM PROXMIRE:, WIS.. VICE CHAIRMAN JOHN SPARKmAN, ALA. J. W. FuLBRIGHT, ARK. HERMAN E. TALMADGE, GA. STUART SYMINGTON, MO. ABRAHAM RH:11E0FR, CONN. JACOB K. JAVITS, N.Y. JACK MILLER, IOWA LEN B. JORDAN, IDAHO CHARLES H. PERCY, ILL. JAMES W. KNOWLES, DIRECTOR OF RESEARCH  (\  April 23, 1969  Honorable David M. Kennedy Secretary of the Treasury U.S. Treasury Department Washington, D. C. 20220 Dear Mr. Secretary: On April 15 the International Monetary Fund announced that South Africa had drawn its gold tranche, which totaled the equivalent of $66 million and was taken largely in dollars. As you may know, in its recent annual report, both the Democratic and Republican members of the Joint Economic Committee strongly endorsed the existing two-tier price system for gold and urged its preservation. The majority observed "The two-tier price system for gold should be maintained in its present form." Similarly, the Republican minority stated, "We . . . endorse the two-tier gold price system and urge that all appropriate measures be taken to preserve it." Because we feel that the South African drawing endangers the functioning of the two-tier price system and potentially threatens the gold-exchange standard that is the foundation of the international monetary system, we would like to draw your attention to this danger and suggest an appropriate response by the U.S. Executive Director to the International Monetary Fund. Since the two-tier system was instituted slightly over a year ago, the free market price of gold has risen to a current level of about $43 per ounce. This level is far below the dire predictions broadcast early in 1968 by speculators and some gold dealers. The events of the last year have demonstrated that the two-tier system can work, and that a free market price somewhat above the official level need not endanger the position of the dollar or threaten the international monetary system. When the March 17, 1968, Washington accord was reached, it was presumed that South Africa would continue to sell gold in the free market. These supplies would tend to reduce the differential between the private market price of gold and the official value.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Honorable David M. Kennedy Secretary of the Treasury  April 23, 1969 -2-  As the differential increases, the temptation mounts for central bankers to realize a profit by selling their gold in the private market. Such bankers might even attempt to evade the provisions of the March agreement and purchase gold from the United States to replace that which they had previously sold. Repetition of this process, unless detected and halted, could denude the United States of its gold reserves. The existence of a substantial differential between the private market price and the official value of gold also threatens to split the international monetary system in another way not prohibited under the March accord. If the differential grew to sufficient size, central bankers holding significant amounts of dollars might lose confidence in the U.S. currency and rush to exchange their dollars for gold. But however the United States might lose its gold reserves, the outcome would probably be a freely fluctuating exchange rate for the dollar or formation of a dollar bloc. I am sure you would agree that either development would be highly undesirable. Contrary to expectations, South Africa has withheld gold from the market in an effort to maximize the differential between the private and official prices. Through this tactic, it has attempted to force an increase in the official value of gold and to undermine the role of the dollar in international transactions. Such behavior threatens, rather than promotes, international monetary stability. Despite South Africa's best efforts to force the rest of the industrialized world to its knees and impose a monopolistically engineered increase in the official_price of gold, the free market price has risen far less than the speculators predicted. The failure of the free market price to rise more than it has, even when virtually no new supplies have been offered, suggests that gold is overvalued. South Africa's reluctance to sell its gold in the free market offers striking evidence of its unwillingness to reveal how little the current gold output would be worth to private interests now that all official price supports have been removed. As a reflection of its recent disruptive tactics, South African reserves have increased at an extraordinary rate. From the equivalent of $778 million at the end of 1967, total reserves nearly doubled to $1,471 million on December 31, 1968, and have continued increasing in 1969. That nation's reserves are now at an apparent all-time peak.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Honorable David M. Kennedy Secretary of the Treasury  April 23, 1969 -3-  This most recent card -- the IMF drawing -- has apparently been played to see whether South Africa can permanently avoid sales in the free market and so avoid revealing the extent to which gold is overvalued. If this drawing is repaid in gold, as is permissible under the IMF Articles of Agreement, then the combined effect of the drawing and repayment will be to leave the size of South Africa's reserves unchanged, but to alter their composition. Repetition of this procedure would permit South Africa to sell whatever quantity of gold it so desired at the official price, and continue to stay out of the free market. Thus, the artificial disparity between the free market and official price would be maintained, or even increased. We agree that gold tranche drawings from the IMF should be virtually automatic, and do not object to the action of the U.S. Executive Director in not raising any objection -- at the time -- to the South African move. We also commend you for continuing former Secretary Fowler's good work in resisting South Africa's efforts to sabotage the international monetary system and to force an increase in the official price of gold on the rest of the world. Let us now clearly recognize South Africa's intentions and resolve not to accept passively this latest ploy. Article V, Section 5, of the IMF Articles of Agreement states: Whenever the Fund is of the opinion that any member is using the resources of the Fund in a manner contrary to the purposes of the Fund, it shall present to the member a report setting forth the views of the Fund and prescribing a suitable time for reply. After presenting such a report to a member, the Fund may limit the use of its resources by the member. If no reply to the report is received from the member within the prescribed time, or if the reply received is unsatisfactory, the Fund may continue to limit the member's use of the Fund's resources or may, after giving reasonable notice to the member, declare it ineligible to use the resources of the Fund. We feel that the South African drawing clearly is contrary to exchange rate stability and successful evolution of the international monetary system. We urge that you instruct the U.S. Executive Director to cite Article V, Section 5, as the basis for preventing further South African drawings that are not consistent with international monetary stability.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Honorable David M. Kennedy Secretary of the Treasury  April 23, 1969  -4In arguing its case, we suGgest that the United States emphasize a principle customarily observed by Fund members and explicitly recognized in the text of the pending Special Drawing Rights amendment -- that neither use of the SDR facility nor any other transaction with the Fund should be permitted for the sole purpose of altering the composition of a nation's reserves.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  We suggest the following action by the U.S. Executive Director: 1.  At the next meeting of the Board of Executive Directors, Mr. Dale shold raise the question of whether South Africa's drawing -- in view of the persistent payments surpluses of that nation and its unprecedented level of reserves -- was not in fact for the purpose of altering reserve composition rather than size.  2.  If the South African drawing is repaid in gold, he should point to this action as prima facie evidence that the intent of the drawing was in fact to alter reserve composition.  3.  He should propose that throuzh a decision by the Executive Directors, the principle elucidated under the SDR amendment be extended to the use of all Fund resources -- that such resources are to be used only for financing legitimate and demonstrated payments deficits or for meeting anticipated exchange crises, but not merely to alter the composition of reserves.  4.  If South Africa repays in gold, he should argue that the S rawing was used "in a manner contrary to the purposes of the Fund" under Article V, Section 5, and that South Africa be prohibited from making any further drawing of any type until a legitimate balance-of-payments need is demonstrated. Such a need can be demonstrated only after South Africa has sold on the free market all gold produced since March 17, 1968.  Honorable David M. Kennedy Secretary of the Treasury  April 23, 1969  -5In conclusion, we favor an amendment to the Articles of Agreement making gold tranche drawings fully automatic when a legitimate balance-of-payments need is demonstrated.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  \ c-A Henry S. Reuss, M.C.  j(„ ,  William B. Widnall, M.C.  THE SECRETARY OF THE TREASURY WASHINGTON  a (iv:A/at Dear Mr. Reuss:  06 Itto. cry,a_ I v&ry much understand and appreciate your, Congressman Widnalltep oefiern 'with respect to the recent uth African drawing on the International Monetary Fund.'I also welcome your strong support of the two-tier gold system and your interest in its effective functioning. 4 r '  4  I 01144,41,  /1444 The drawing by South Africa on thq(IMF will not, in m y7 opinion, undermine re-Gent arrangements; and I am glad you/agree that the United States should not have objected to their-drawing in the gold tranche. We have long supported the concept thati suGh drawings be virtually automatic, andil am convinced 0,z440 that any_repeated-abuse of the privilege,can--b4..-ffectl-vely Mipx halt 1,,144;1mazaft-hh-,-1-111Tmastiaa—tha*-eutmeticit_y. 16.0141,  0,p-A  'Ad  r  to,„,aty„.4„,..zazudsvam  „0,10  itt ow bit It is true, with respect to the $59 million portion of the, drawing representing South Africa's gold tranche, that 4APV-41 South Africa may, under certain provisions of the Articles of; 9:4044 4 Agreement of the IMF, be able to repay a substantial portion 444tv in gold. Indeed, it appears likely that, under the mandatory: 10.0 repayment provision of the Articles, it will be compelled to / do so. It is our understanding that the Finance Minister of South Africa, in presenting their IMF transaction to his Parliament, described the mandatory repayment provision of the Articles as the expected means of repaymentOperations under this provision could be undertaken but once a year for \ a maximum of $50 million of repayment in gold. While the need' ,vtitt of South Africa for this drawing at a time when its gold stock has been rising steadily is not apparent, the amount of gold involved and the potential frequency of the operation do lot involve any danger to the two-tier system,. Oart../ 4-714.0 4/WfrAtt ( Atiaetaitt4 eittia, 44./ aki,m,(0.144 otimii47 Other provisions in the Articles of the IMF would obli',11 gate the IMF to accept gold in repayment only against drawings in the credit tranches. Such a drawing, as you know, is not involved in the present transaction, nor would such a drawing rviAttA. f be automatically available.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  fe4  cerrick-oaf Cut ev4A. a,41,41i,414,04rt. Rae.,n;4  tO/PcIthi •  .441, Armilio7  2  Except for the annual mandatory repayment provision, it is not incumbent upon the IMF to accept repayment in gold for a gold tranche drawing. In a statement made by the Treasury at the time of the South African drawing, we stated that the United States will be observing further developments, not only with respect to this particular drawing but with respect to the consistency of possible further transactions, with the broader objectives of the IMF. As this implies, we shall certainly be alert to any possible future abuses of IMF procedures in an attempt to undermine the effective operation of the two-tier system. We welcome your support in this regard) but see no need for any further statement or action on our part at this time. Sincerely,  The Honorable Henry S. Reuss U. S. House of Representatives Washington, D. C. 20515   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  /aid/  TREASURY DEPARTMENT OFFICE OF THE ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS Date .5/2/6.9. To: Mr. Volcker From:  T. P. Nelson  Attached is a redraft of the proposed response to the Reuss/ Widnall letter on South Africa, as you requested. It is a greatly shortened version from that of Mr. Dale although I have tried to cover most of the same points.  cc:  Messrs. MacLaury, Dale and Willis  T. P. Nelson, Director Office of International Gold and Foreign Exchange Operations  Room 5221 Ext. 2884 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DRAFT:5/2/69 TPNelson:EB Dear Mr. Reuss: (Widnall)  tek; 64?) I very mi-i-Chfappreciate yourand Congressman Widnall's intercct vitb• , taiti)4 Atuai ) eNtitit.(41 and concern with respect to Söii€I5African transacLion the International Monetary Fund, )(our 9fAiLtA-  aAkd  „cce:t4 6,41-4:(2The reeopell-t drawing by South Africa on the IMF dos.s not,ewcvc, ,_) juitx-tvCitztaavououg : 4i,v4tettu in my opinion dAmage—the=eystem(atid I am glad that you agree that  strong support of the two-tier,tsystem  1  the U. S. should not have objected to a drawing in the gold tranche.  fte, &A.4, vIriziv14) -exc.'that such It is--h-ighly—ele-s-i-r-able I •  rt • •V 7  --&-eeetrza, ,-t.-,4zetr Pt- cuit acid  •ir.•  444-4d  drawings be ae automatic as pat,s-s441€  3E-Icel  "VA,  It is true, with respect to the $50 million portion of the  104,/  drawing representing South Africa's gold tranche, that South Africa tti4444:i may, under the rticlesp the IMF, be able to repay a substantial  4  portion in gold.  Indeed, it appears likely that under the mandatory  repayment provision of the Articles that it will be compelled to do so. (ppe-rations under this provision could,--howe-ver, be undertaken but once a year a.act for a maximum of $50 million of repayment in  /Atexq kill4,cautit etc-  gold  "146etc.  Other provisions in the Articles of the IMF would obligate the IMF to accept gold in repayment only against drawings in the::: tranches,  1,1 lettat  ac,4- 1,00.(Aftc.V.4-  Trot involved in the present transaction and which,e,u combeuv4k axt \ as—you-know are not:, as the_ gold tr nchiwautomatically available. (It is our understanding that the Finance Minister of South Africa presenting their IMF transaction to the Parliament, described the mandatory repayment provision of the Articles as the expected means of repayment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  vtarthi, Gui‘tA4trrtbtue,  A4,/,,u/(4e14441 7,41' tAttelt -ttu tbtiv ,  /4r-42-1-yo _4.yere..67 ,a4 k‘frie  a-  "'isle  statement made by the Treasury at the time of the South African drawing, we stated that the United States will be observing further developments, not only with respect to this/Oda:all Ae-,44-6q, drawing but DnEhe consistency of aach ransactions more gener Ty, CA; CUIW certainly s a with the broader objectives of the IMF. 4 V 6,4etrjlectrz /11PAzctelaat Au, #.,to:au torittnue-T-tai be alert to,possiblt,t abusesY -7aja421/welcome your suppor-EM but see no need for any further statement or action on our part  rke  at this time.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  VAA  Sincerely,  THE SECRETARY OF THE TREASURY WASH I NGTON  Dear Mr. Reuss: I both understand and greatly appreciate the concern you and Congressman Widnall expressed with respect to the recent South African drawing on the International Monetary Fund in your letter of April 23. I also welcome your strong support of the two-tier gold system and your interest in its effective functioning. The drawing by South Africa on the IMF will not, in my opinion, undermine present arrangements in the gold market, and I am glad you agree that the United States should not have objected to this drawing in the gold tranche. We have long supported the concept that gold tranche drawings be virtually automatic, and we continue to believe that no douJpt should be cast on the ability of a country to mobilize these funds promptly should it deem a need exists. I am convinced that should experience show that the privilege is being abused by repeated drawings and repayments unrelated to the basic objectives of the IMF, adequate means exist to effectively halt such practices. It is true, with respect to the $50 million portion of the recent drawing representing South Africa's gold tranche, that South Africa may, under certain provisions of the Articles of Agreement of the IMF, be able to repay a substantial portion in gold. Indeed, it appears likely that, under the mandatory repayment provision of the Articles, it will be compelled to do so. It is our understanding that the Finance Minister of South Africa, in presenting their IMF transaction to his Parliament, described the mandatory repayment provision of the Articles as the expected means of repayment. Operations under this provision could be undertaken but once a year for a maximum of $50 million of repayment in gold. While the need of South Africa for this drawing   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2 -  at a time when its gold stock has been rising steadily is not apparent, the amount of gold involved and the potential frequency of the operation do not involve any danger to the two-tier system. Moreover, to the extent South Africa may have merely wished to test and confirm the automaticity of the gold tranche drawing right, that purpose will have been achieved and the drawing need not imply repetition in the future. Other provisions in the Articles of the IMF would obligate the IMF to accept gold in repayment only against drawings in the credit tranches. Such a drawing, as you know, is not involved in the present transaction, nor would such a drawing be automatically available. Except for the annual mandatory repayment provision, it is not incumbent upon the IMF to accept repayment in gold for a gold tranche drawing. In a statement made by the Treasury at the time of the South African drawing, we noted that the United States will be observing further development, not only with respect to this particular drawing but with respect to the consistency of possible further transactions with the broader objectives of the IMF. As this implies, we shall certainly possible future abuses of IMF procedures undermine the effective operation of the gold market. We welcome your support in see no need for any further statement or part at this time.  be alert to any in an attempt to two-tier system this regard, but action on our  Sincerely,  The Honorable Henry S. Reuss House of Representatives Washington, D. .C. 20515   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  THE SECRETARY OF THE TREASURY WASH I NGTON  Dear Mr. Reuss: I both understand and greatly appreciate the concern you and Congressman Widnall expressed with respect to the recent South African drawing on the International Monetary Fund in your letter of April 23. I also welcome your strong support of the two-tier gold system and your interest in its effective functioning. The drawing by South Africa on the IMF will not, in my opinion, undermine present arrangements in the gold market, and I am glad you agree that the United States should not have objected to this drawing in the gold tranche. We have long supported the concept that gold tranche drawings be virtually automatic, and we continue to believe that no doubt should be cast on the ability of a country to mobilize these funds promptly should it deem a need exists. I am convinced that should experience show that the privilege is being abused by repeated drawings and repayments unrelated to the basic objectives of the IMF, adequate means exist to effectively halt such practices. It is true, with respect to the $50 million portion of the recent drawing representing South Africa's gold tranche, that South Africa may, under certain provisions of the Articles of Agreement of the IMF, be able to repay a substantial portion in gold. Indeed, it appears likely that, under the mandatory repayment provision of the Articles, it will be compelled to do so. It is our understanding that the Finance Minister of South Africa, in presenting their IMF transaction to his Parliament, described the mandatory repayment provision of the Articles as the expected means of repayment. Operations under this provision could be undertaken but once a year for a maximum of $50 million of repayment in gold. While the need of South Africa for this drawing   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  at a time when its gold stock has been rising steadily is not apparent, the amount of gold involved and the potential frequency of the operation do not involve any danger to the two-tier system. Moreover, to the extent South Africa may have merely wished to test and confirm the automaticity of the gold tranche drawing right, that purpose will have been achieved and the drawing need not imply repetition in the future. Other provisions in the Articles of the IMF would obligate the IMF to accept gold in repayment only against drawings in the credit tranchcs. Such a drawing, as you know, is not involved in the present transaction, nor would such a drawing be automatically available. Except for the annual mandatory repayment provision, it is not incumbent upon the IMF to accept repayment in gold for a gold tranche drawing. In a statement made by the Treasury at the time of the South African drawing, we noted that the United States will be observing further development, not only with respect to this particular drawing but with respect to the consistency of possible further transactions with the broader objectives of the IMF. As this implies, we shall certainly possible future abuses of IMF procedures undermine the effective operation of the gold market. We welcome your support in see no need for any further statement or part at this time.  be alert to any in an attempt to two-tier system this regard, but action on our  Sincerely,  The Honorable Henry S. Reuss House of Representatives Washington, D. C. 20515   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  THE SECRETARY OF THE TREASURY WASH I NGTON  Dear Mr. Reuss: I both understand and greatly appreciate the concern you and Congressman Widnall expressed with respect to the recent South African drawing on the International Monetary Fund in your letter of April 23. I also welcome your strong support of the two-tier gold system and your interest in its effective functioning. The drawing by South Africa on the IMF will not, in my opinion, undermine present arrangements in the gold market, and I am glad you agree that the United States should not have objected to this drawing in the gold tranche. We have long supported the concept that gold tranche drawings be virtually automatic, and we continue to believe that no douiDt should be cast on the ability of a country to mobilize these funds promptly should it deem a need exists. I am convinced that should experience show that the privilege is being abused by repeated drawings and repayments unrelated to the basic objectives of the IMF, adequate means exist to effectively halt such practices. It is true, with respect to the $50 million portion of the recent drawing representing South Africa's gold tranche, that South Africa may, under certain provisions of the Articles of Agreement of the IMF, be able to repay a substantial portion in gold. Indeed, it appears likely that, under the mandatory repayment provision of the Articles, it will be compelled to do so. It is our understanding that the Finance Minister of South Africa, in presenting their IMF transaction to his Parliament, described the mandatory repayment provision of the Articles as the expected means of repayment. Operations under this provision could be undertaken but once a year for a maximum of $50 million of repayment in gold. While the need of South Africa for this drawing   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  at a time when its gold stock has been rising steadily is not apparent, the amount of gold involved and the potential frequency of the operation do not involve any danger to the too-tier system. Moreover, to the extent South Africa may have merely wished to test and confirm the automaticity of the gold tranche drawing right, that purpose will have been achieved and the drawing need not imply repetition in the future. Other provisions in the Articles of the IMF would obligate the IMF to accept gold in repayment only against drawings in the credit tranches. Such a drawing, as you know, is not involved in the present transaction, nor would such a drawing be automatically available. Except for the annual mandatory repayment provision, it is not incumbent upon the IMF to accept repayment in gold for a gold tranche drawing. In a statement made by the Treasury at the time of the South African drawing, we noted that the United States will be observing further development, not only with respect to this particular drawing but with respect to the consistency of possible further transactions with the broader objectives of the IMF. As this implies, we shall certainly possible future abuses of IMF procedures undermine the effective operation of the gold market. We welcome your support in see no need for any further statement or part at this time.  be alert to any in an attempt to two-tier system this regard, but action on our  Sincerely,  The Honorable Henry S. Reuss House of Representatives Washington, D. C. 20515   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  May 13, 1969  Dear Mr. Gampell: Many thanks for the recent copies of the Economic X-Ray -- even though I miss the sunshine. I appreciate your good wishes as we try to work through our inheritance. Sincerely, (Sig!) sc,1  Paul A. Volcker  Mr. Sydney Gampell Reuters Limited 85 Fleet Street London EC4, England  -a  40 0 40 0 0 fi 00 40 40 40 41 • 0  40 0 40 0 41 00 40 40 40 00 40 0  41 41 40 0 40 41 0 • • 40 • • 40 0 40 0 41 0 40 40  40 00 41 40 40 000 40 0 4,0 40  40 41• •000 • •S 40 40 4, 4,0 4,0 0 41 0 0 40 40 0 411  9 1969.  May 7 1969  From the Financial Editor  Mr. Paul A. Volcker, Under Secretary for Monetary Affairs, United States Treasury, Washigton D.C.  Dear Mr. Volcker, As promised by Mike Nelson when he dined with you on Friday, enclosed are the recent issues of the weekly Economic X-Ray which has been my baby since 1935. Fred Deming and your other predecessors, and also some of your former banking colleagues in various places, have claimed to be diligent readers of it, either direct or in the (New York) Weekly Bond Buyer. As it nowadays contains little sunshine and less flattery, here is a bit of draft which my secretary typed out yesterday, when I had no idea that I would be writing to you, its context was your inheritance. "The present U.S. Treasury Secretary, Mr. David M. Kennedy, is a serious man tackling serious problems. He is highly regarded by bankers as well as officials in Europe as well as the Americas, and some of them have an idea that he is leading the best official financial team (in New York as well as Washington) that the U.S. has had since Alexander Hamilton was its first Treasury Secretary." That view is held by distinguished persons. It is the best earnest for your success - whereon my warmest personal good wishes - in your unenviable heritage. Sincerely,  ttAAA agAI: ottAblatekw-.° jAgflol °ie  AAP). Afr-ow  t1,01^ km-gok  Sydney Gampell Reuters Limited 85 Fleet Street London EC4 Telephone Fleet Street 6060 Extension 103  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: Newspaper articles Citations:  Number of Pages Removed: 9  Reuters. "The Economic X-ray." May 5, 1969. Reuters. "The Economic X-ray." April 28, 1969. Reuters. "The Economic X-ray." April 21, 1969.  Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  https://fraser.stlouisfed.org  1.;  1  Ve..Ly 1....T....1...7.11 i!!?7,7•1. :C.' f..:..41 LC: :10.0.1; 17....  iny ric:-,t;.".:21 t:1,..-::)11 to a 7..)1ol.11c.:-,1 t.t: r1J-1..:.;:):.: .:-,i.•...'-.... CI ... , e7.3c. -.41-1.'P ..4  f.. .I .  : 7 -.7 . ....  -,  •. , -, •  ' ''.'  ..' •  •  -  ..  ..  -':  'Ai  *".." '7,  , ....1,;›  • •••••1 . , , 1 1, ... , ..1.....  , ..,  ....  f  ;-,.-.....  ''..  U. 3. r2.c:Itrc. to ty..r,r1:,_;Zerred L7A its ref.;c.r, or 11::±carr_..Z.7. untl2rs'cild dit Secretarv ii urzed 1:t th -Ozptioa of such a i'roviso.. chare hir.; vicr.l. cs Le unt.ioubtely w2s, that tho mstc!rial c.1,41-c'e ti %ould ;.cluire in ele IDA 13olution:5 voald 1-.:ef_Gate &ay .avorabia Cor..r7xessioila1 on TR. 33, (Ind vc.-.11.11 have .1.161 tt1y fixate:ate rf:-.pleninirK)nt J:17-Xi corArG into effcct. 02 olLic r. canro 5.a th.t.5; i- --, ci s'a suld r' ire ,'") ic prect.d the pr7.,nr. cre..13 the. U. cYfri., to obellin 00.9c.w.,-;cnts z1.1To n thrtre oZ provis1osa2 bs loot: if. not Eliy:.;ssi:ile Yt 1 J c211ion hiwe Cotained za Criv  cc:  :  •  i   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  C •  - 2airing this rcplenishmt at lenst in the snm,n proportion as lat yonr wIln the World nark transfe=ed 75 rillion out of its 0.47 willion of net earnin3s. Based 0A the present olztlook,.I do not: foresee during this replc:uislImeat a decline ii tr4.1nsa,rs suclh as occurr(Jd in 1967, md so conditions ret, would co-rt4lin1y support incrcaaes over the 1963 level of trzIA%323 imt c.nrilis. I cza assured by the Pidcnt of tho Vorld 7an% tjlt is p7:cpared to suppori; this objective Lore his govezi-iirL; roards. nil° I do not to cmnent directly on t71c, ilea:;paper account you reEerred to, I:2;„. 1 enclosing fo..c your Information a copy of. a letter sent lavt year by Secretary Fowler to the Acting Chairman of the Senate Foreign nelatioas Coaittiee, Senator S;?sarkman, which dealt with this issue. This, understalld, vas the final position of the previous ilf.Ainist=tion on the mutter. 'want you to know of my great Lvprec..7.atioll for your fira sucporZ: of prc2t and favoroble con3ressional cr-:ion on m.r. 33. Sincerely yours,  Thn 7.;11i....73 Z.  D. C.  2C513  OASIAC.Clirschtritt:vb   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3/7/69   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  March  3, 1969  Dear Marchant: Thank you for inviting Barbara and me to attend the reception and dinner the visiting group of Virginia Bankers are planning to have at the Carlton on March 24th. My family has not yet moved down from New Jersey and it is doubtful that Barbara will be in Washington then. In any event, I will be happy to join you. Sincerely,  Paul A. Volcker  Mr. Marchant D. Wornom Executive Vice President Virginia Bankers Association Richmond, Virginia  FES 2 7 1969  VIRGINIA BANKERS ASSOCIATION RICHMOND MARCHANT D. WORNOM ExEcurivE  VICE  PRESIDENT  February 26, 1969  Dear Paul: The Officers and certain committeemen of the Virginia Bankers Association are planning to be in Washington March 24 and 25, 1969, for the purpose of visiting with our Congressional delegation and the heads of the various banking supervisory authorities and other governmental agencies.  e. A tio...,; (' ; CC 146 1 40Lt 4... r.) ti) rtS r tifc  On Monday evening, March 24, at six o'clock we are having a reception and dinner in the North Lounge and Oic Chandelier Rooms of the Sheraton Carlton Hotel honoring the Virginia members of Congress and their wives. We extend to ypu and Mrs. Volcker a cordial invitation to join us on this occasion and look forward to an early acceptance of our invitation. C  C  Cordially yours,  c7:1  /1)' Honorable Paul A. Volcker Under Secretary for Monetary Affairs United States Treasury Department 15th Street and Pennsylvania Avenue, N. W. Washington, D. C. 20220   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  February 25, 1969  Dear John: I uns sorry to miss you, but glad to hear the news of Bob Riley.  Things remain  a bit hectic, but I assume I will survive. Sincerely,  Paul A. Volcker  Mr. John D. Wilson Senior Vice President The Chase Manhattan Bank I Chase Manhattan Plaza New York, New York 10015  FEB 2 4  THE CHASE MANHATTAN BANK National Association  PP170  CO  1 Chase Manhattan Plaza, New York, New York 10015  JOHN D. WILSON  February 21, 1969  Senior Vice President  The Honorable Paul A. Volcker Under Secretary of the Treasury for Monetary Affairs The Treasury Department Washington D. C. Dear Paul: I was in Washington on Tuesday and Wednesday and among other things called on the Comptroller to talk about legislation on One-Bank Holding Companies. I stopped by to say hello to you but found you were on the Hill. We have heard very good reports from Western Europe on the fine impression you made in your recent visit there. I thought the publicity in the U. S. also was generally favorable, so you are off to an excellent start. However, I know there are bound to be some bumps in the road ahead! I thought you would like to hear that Bob Riley was promoted to Vice President this last week. Among other matters, he is heading up a special task force which will study our information fieeds within the Bank and how best to meet them in the next few years. Of course he continues to head up Market Research. Lee Loree was finally persuaded of the merits and desirability of the promotion.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  All the best,  John D. Wilson  WmIAA  ,;.  " 4- tif."4  4,4P'  (t  44  X 44 1  teatICA;440fe)?  , s;f  74-6.1  -4444( DR. OTMAR EMMINGER MITGLIED DES DIREKTORIUMS DEUTSCHE BUNDESBANK  DigitizedFRANKFURT for FRASER AM MAIN https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  EB 3  _.10  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: Speech Citations:  Number of Pages Removed: 9  Emminger, Otmar. "The Monetary Scene Today." Board of Governors, January 24, 1969, Deutsche Bundesbank, Frankfurt (Main).  Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  https://fraser.stlouisfed.org  January 24, 1969  •  The Monetary Scene Today Excerpts from an address by Otmar Emminger, Board of Governors, Deutsche Bundesbank, Frankfurt (Main), on January 24, 1969  I. Recent developments 1. Domestic 2. International: In the area of international monetari developments ,Aly jaziang 1968 can be called the year of : The sterling devaluation of November 1967 did not lead - contrary to all expectations and calculations - to a final restoration of the British balance of payments in the second half of 1968, although a slow improvement can now be discerned. The two-tier golS market, established in March 1968, was viewed by many experts including even some of the central bank governors involved, as only a temporary expedient, meanwhile it has proven to be an important step in the direction of stabilizing the international monetary system and it may well be maintained in one form or another for quite some time. As concerns the US dollar, all expectations and forecasts have also gone wrong, both to the bad and the good side. The equrating of the American budget in June 1968 by raising taxes and cutting expenditures which was expected to bring about a quick dampening of excess demand and improvement in the trade balance had not brought any of the expected results by the end of last year. On the contrary, the US trade balance is still in a deplorable state. Nevertheless, the overall I.lance of payments of the US unexpectedly showed a surplus   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  in 1968 for the first time in 11 years even on the liquidity basis, I. e. not counting the inflow of short-term bank funds as capital imports. It is, of course, true that some of the longer-term capital inflows that brought about this reversal may well prove to be volatile; but still, this unexpected balance-of-payments result marks the height of last year's forecasting mistakes; for a number of experts had predicted (as late as spring 1968) a deficit for 1968 of 4 to 5 billion dollars.  II. Present monetary situation in Germany Germany entered the year 1969 with the economy at full speed and with all the resources fully employed. Of late, the question has often been asked whether it is not time for the Bundesbank to tighten somewhat the reins of monetary policy. The Bundesbank has so far been pursueing a policy of wait and see. This policy is mainly based on two considerations: We expect that the external measures taken last November, i. e. the 4 % special tax on exports and the  4 % tax rebate on imports, will significantly reduce the pressures on the German economy in the near future, and this in two ways: The expected stimulation of imports and slowdown in export growth will reduce demand on domestic resources. Moreover, through the lowering of the DMark prices of internationally traded goods, especially import goods, there will be a direct dampening effect on the internal price level. According to expert estimates this double effect could reduce the price rises otherwise to be expected by about 1 % in 1969. The "revaluation substitute" of 4 % can by no means be considered as a quantite negligeable, unless it would be nullified by even stronger inflation abroad. In the near future, however, international developments seem more likely to strengthen rather than counteract the effectiveness of this revaluation substitute. The auspices for anti-inflationary policies abroad look better today than   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ,  -3-  •  3  they were a year ago. The United States, in particular, appears to be determined to squeeze the inflation out of its economy. And as the fiscal restraints imposed last year have proved to be insufficient the American authorities have now tightened credit to an extent as to cause interest rates in some fields to rise to historic peaks. In the United Kingdom and in France, too, the budgetary restraints will now be supported by rather severe credit restrictions which in turn have produced corresponding effects on interest rates. Thus in the monetary sphere and especially in the sphere of interest rates, the much-needed balance-of-payments adjustment has finally come about. High interest rates in the deficit countries, UK, US and France, are now set against relatively easy money in the surplus countries Germany, Switzerland and Italy. We cannot expect that the effects of both the German and foreign measures will be reflected in trade and other statistics already in a few weeks' time. In Germany, in particular, we shall have to wait for several months until we can get reliable statistical indications of the effects of the recent measures. The deadline of 23 December 1968 for the exemption of "old contracts" from the 4 % export tax, has lead to a massive bunching of export deliveries to an extent that not only trade but also production and other statistics for November and December have become grossly distorted. A second development which has made it possible for the Bundesbank to continue its easy money policies has been the favourable evolution of budgetary policy. Contrary to the experience during the last boom (1964 - 66), this time budgetary policy has been in conformity with cyclical requirements ...  As concerns the German surplus position, it has often been asked: Are the new tax measures, the "revaluation substitute" of 4 %, really able to provide a better equilibrium? Or will they only gain us some breathing space   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  4  before inevitably leading to a "genuine" revaluation? It would be pointless to argue now, after the event, about whether a clear-cut revaluation would have been preferable to the tax substitute, or whether the date for the expiration of the tax measures, i. e. end of March 1970, has been well chosen. Basing myself on the decisions taken, I come to the conclusion: It is not only possible but to some extent even likely that a viable external equilibrium of the German balance of payments will be attained within the present framework. And the expiration of the tax measures at the end of March 1970 is not inevitably a built-in "time-fuse", as has often been assumed, since there is the possibility of extending the tax measures beyond that date. It would lead me too far to discuss here this year's probable developments in the German balance of payments. Let me say only this: The surplus on current account for 1969 can be roughly estimated at between 5 and 7 billion DMarks (= 1.2 to 1.7 billion Dollars); it could even turn out to be one or two billions less if we assume that the abnormal bunching of exports and export remittances during the closing months of 1968 (and especially in November and December due to the deadline of 23 December 1968 for the exemption of "old export contracts") will result in corresponding shortfalls in 1969. We should be able to compensate, or even overcompensate, a current surplus of this order of magnitude by long-term capital exports. Last year net long-term capital exports amounted to no less than 10 billion marks (= 2 1/2 billion Dollars). About half of that amount, however, was provided by the banking system, and we cannot count on the banks being as liquid this year as they were last year and thus being able to export a similar amount of capital. Nevertheless, there is a likelihood that in 1969 the basic balance, i. e. current account and long-term capital account, will be in deficit rather than in surplus. If we shall be spared speculative foreign exchange inflows, the DMark could well come under pressure in the markets now and then. In recent weeks we already had a foretaste   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5  5  of that experience when the DMark slipped below its dollar parity. The reasons for the present DMark weakness do not lie in the substantial short-term money exports by German banks (as was said in newspaper reports), since such transactions generally are carried out by way of swaps with the Bundesbank and do not at all affect the foreign exchange markets. In addition to the money exports of the banks we have had genuine foreign exchange withdrawals in a considerable volume. The foreign funds deposited with German banks during the crisis just before the Bonn monetary conference are in the aggregate completely withdrawn by now. This of course means, that the emergency measures taken in November, namely the foreign exchange controls against speculative money inflows to the German banks and the 100 % minimum reserve requirement on the increase in bank liabilities towards non-residents, have for all practical purposes become redundant. As concerns the past foreign exchange inflows due to abnormal changes in "leads and lags", i. e. the timing of export and import payments, the story is different. Because of their very nature these flows can be unwound only over a somewhat longer period.of time, i. e. after the timing of payments for exports and imports has become normal again. Druing the crisis, i. e. during the first three weeks of November 1968, the reserves of the Bundesbank had been swelled by almost 9 1/2 billion marks. Over the two months following the Bonn monetary conference the Bundesbank has lost foreign exchange to the amount of more than 11 billion marks (= 2 3/4 billion Dollars!) through both genuine withdrawals of foreign funds and short-term money exports by the German banks. Thus our reserves are now more than 1 1/2 billion marks lower than at the end of October 1968 when the latest speculative explosion began. If we count only gold reserves and freely usable foreign exchange assets, the total is now even smaller than it was a year ago. We can thus really speak of a complete normalization in our foreign exchange situation. The beneficiaries of the huge foreign exchange outflow have been, apart from the Euro-money market, primarily France and, since the beginning of January, also the United Kingdom.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -6  -6 -  IV. Taking the present situation and probable future tendencies together, there seems to be a good chance that in 1969 the German monetary and foreign exchange situation by itself will not cause any unrest or crisis. However, we do not live alone in this world. Nobody is able to predict whether developments in other countries will expose the international monetary system to new strains, with repercussions on other currencies including the mark. Events in France last year have demonstrated that unforeseeable political and social upheavals can quite suddenly affect currencies and cause great stresses and crises. If we disregard for a moment the possibility of such outside disturbances, the present international monetary situation does not seem to be in such a confused and precarious situation as is frequently claimed. It is true that neither Sterling nor the French Franc have already overcome their difficulties. But in both these countries energetic monetary and fiscal measures were taken to correct the domestic and external disequilibria. I expect that Great Britain will achieve equilibrium in its balance on current account over the next few months, although it may still take some time until the indispensable surpluses in its balance of payments will show up. France will probably need more time to attain a balance in its external accounts; however, its efforts are backed by still very large reserves and foreign credit facilities - at present the official reserves amount to about 4 1/2 billion dollars and the unused credit facilities to approximately 2.7 billion dollars - which will enable it to bridge a longer transition period. It has frequently been assumed that one or the other of these countries is only waiting for a chance to change its parity without loss of prestige in the framework of a multilateral adjustment of parities, a so-called "re-alignment". But if one watches the intense and often painful efforts undertaken by these countries to overcome internal and external disequilibria it is hardly conceivable that these countries should be willing voluntarily to throw away the gradually  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7  7 ripening fruits of their endeavours - which in the end should lead to better domestic cost and price stability - only to plunge into renewed uncertainties, disturbances and price increases. As far as there is speculation on a German participation in a general re-adjustment of parities, I only want to point out that for example the agricultural problems arising from an up-valuation would not disappear if the mark were upvalued in conjunction with other parity adjustments rather than unilaterally; and these agricultural problems were one of the main reasons for introducing border tax adjustmens instead of a straightforward revaluation. To state it very clearly: I do not believe in the likelihood of a multilateral re-adjustment of parities. It would even not be very useful in the longer run if the monetary, fiscal and incomes policies of the countries concerned were not directed towards establishing better equilibrium. The disappointingly small and slow effects of the British 14 % devaluation should have cured those who expect miracles merely from parity changes without accompanying domestic measures. I also do not expect anything from a big international monetary conference, either on a worldwide or a more restricted scale, to discuss either particular parity problems or a reform of the present exchange rate structure. Such a conference would only create renewed distrust in parities and create unrest in international payments and trade, without much prospect of practical achievement What we now need is a period of calm in order to let the measures recently taken by important surplus and deficit countries work themselves out.  V. Only in a period of calm can discussion of possible improvements and reforms of the international monetary system be useful. The present system is by no means so deficient as the academic critics (and others with them) often have asserted. At the same time it does not function so well that it should not be further improved. The system has in fact undergone continuous change over the past 20 years. Last year again certain improvements were added which are designed to underpin its stability: With the introduction of the two-tier gold   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  8-  - 8-  market the disturbing effects of private gold speculation on the international monetary system have been largely eliminated. The Basle Agreement on the U.K.'s external sterling liabilities of September 1968 has largely removed the potential dangers of this relic of the past. In 1969 further progress can be expected when the so-called SDR system will enter into force. This, however, will be a reform for the longer term, and we cannot expect from it any immediate relief for our acute problem of large payments imbalances. The latest monetary crises have stimulated the zeal of monetary reformers. Proposals for reform abound. One of the new ideas suggests the setting-up of a so-called "monetary mechanism" by which foreign funds flowing into one country during a speculative crisis would be re-channeled to the country loosing reserves in a more or less automatic way. In my view such an automatism would not amount to a reform of our monetary system but would rather undermine it. It would further weaken the disciplinary effects of payments deficits and either foster general inflation or accentuate the differences between the evolution of prices and costs in the deficit countries on the one hand and the surplus countries on the other. The Bundesbank, therefore, has come out against all proposals providing for automatic re-cycling of foreign exchange losses without time-limit or ceiling on amounts. Most current reform proposals aim at greater flexibility in the present exchange rate system. As is well known the discussion centres on two suggestions: The first would allow fluctuations of exchange rates within a wider "band" than the - 1 % at present permitted under the Fund Agreement, and the second would permit frequent parity adjustments in small steps ("crawling peg"). I do not want to discuss all the technical questions involved, many of which have not been clarified so far. The main problem, in my opinion, is not that a system of wider margins would create more uncertainties for foreign trade and business in general; there is a lot of uncertainty also in the present system, for instance whenever there is distrust in the existing parities. But to introduce significantly greater flexibility into the exchange rates would amount   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9  ,M16  9  to a fundamental decision for greater autonomy in national monetary and economic policy as against closer integration. For most countries increased monetary autonomy through exchange rate flexibility would amount to a lessening of balance-ofpayments discipline and loosening the brakes against inflation. For the member countries of the European Economic Community there is no choice anyway. A substantial widening of the margin for exchange rate fluctuations would clearly have disintegrating effects, and it could hardly be reconciled with the EEC regulations for the agricultural markets. The proponents of greater exchange rate flexibility have proposed to make the EEC currencies fluctuate uniformly as a kind of monetary bloc against the dollar and other non-EEC currencies. Such a harmonization of exchange rate fluctuations for the EEC countries would raise more technical difficulties and also problems oi monetary policy than its proponents seem to be aware of, especially as the EEC group sometimes comprises extreme deficit as well as surplus countries. We should have no illusions that any new mechanism could be a cure-all - and perhaps even a painless one for tensions and crises in the international monetary system. To me it seems to be more urgent to continue working for the elimination of the existing imbalances between the major countries by applying the available instruments of economic and monetary policy. The international monetary system is at present in a state of convalescence. Let us try to give the patient enough rest so as to enable him to regain his full equilibrium and health.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
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