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Authorized for public release by the FOMC Secretariat on 8/21/2020 OF T BOARD GOVERNORS OF HE FEDERAL RESERVE SYS T EM WASHINGTON, D.C. 20551 October 14, CONFIDENTIAL 1974 (FR) TO: Federal Open Market Committee FROM: Arthur L. Broida Enclosed for your information is Governor Wall ich and Mr. Truman a copy of a report by on the recent annual meetings of the International Monetary Fund and World Bank. Authorized for public release by the FOMC Secretariat on 8/21/2020 Henry C. Wallich Edwin M. Truman October 13, 1974 CONFIDENTIAL (FR) Report to the F.O.M.C. on The Annual Meetings of the Governors of the I.M.F. and World Bank September 30 - October 4, 1974 The immediate problems facing the world economy, rather than long run monetary reform, received the primary focus in speeches and private discussions at the Annual Meetings of the Governors of the I.M.F. and World Bank held in Washington September 30 - October 4. Inflation is still regarded as the major problem in the context of the business cycle. But considerable concern was also expressed about the risks associated with the slowdown or reduction in the rate of growth of real economic activity in many countries. Among the developed countries, this latter theme was stressed by the representatives of Italy, the United Kingdom and Canada. Moreover, most representatives from developing countries emphasized their worries that a slowdown in the industrialized countries would aggravate the already serious economic problems of those developing nations that are not oil exporters. Massive oil-related current account imbalances were the particular aspect of the world economic situation that attracted principal attention. No optimism was expressed that the price of petroleum would come down in the near future and reduce the root cause of these imbalances. on means of financing countries' oil deficits. The focus was It was generally agreed that under the circumstances the mechanisms presently available for the financing of oil deficits had worked reasonably well over the past year. argued by many -- But it was for example, the British, the Italians, and the Germans -- that the private market mechanisms could not accomplish the whole job. Authorized for public release by the FOMC Secretariat on 8/21/2020 CONFIDENTIAL (FR) Denis Healey, U.S. Chancellor of the Exchequer, proposed that a new international facility much larger than the I.M.F.'s present oil Facility should be established. The British apparently favor the establishment of such a facility in the I.M.F. along side the present, concessional Oil Facility at terms closer to commercial rates. This new facility might borrow not only from oil-exporting countries but also from countries receiving disproportionate shares of the investments of the oil exporters. The French and the Japanese, among others, urged that this proposal receive serious consideration. The Managing Director of the Fund, Johannes Witteveen, apparently prefers to enlarge the scale of the Oil Facility that has already been established. The German Minister of Finance, Hans Apel, while not ruling out an expansion of the I.M.F.'s Oil Facility, spoke in favor of "the creation of a specialized investment institution, operated jointly by oil producing and oil consuming nations, that would facilitate the placement of oil revenues in a stable and mutually advantageour manner." By implication, this institution would operate outside of the I.M.F. The U.S. position, as expressed publicly by Secretary Simon, was that "existing financial arrangements" will continue to respond "reasonably well to the strains of the present situation." The United States did not rule out additional international lending mechanisms if it was demonstrated that there was a clear need for them. "Various alternatives for providing such supplementary mechanisms should be given careful study." Authorized for public release by the FOMC Secretariat on 8/21/2020 CONFIDENTIAL (FR) -3- Against this background, the I.M.F.'s new Interim Committee, the succesor body to the Committee of Twenty, meeting on October 3 that it question." It commissioned agreed at its first should give urgent attetion to the "recycling the Executive Directors of the I.M.F. prepare a study of the need for further governmental involvement, through the I.M.F. or otherwise, to either in facilitating the recycling process. The Committee will meet on January 15-16, 1975, to consider this study. The Annual Meetings seemed to create some support for the Witteveen view that "the problem of recycling . . . requires a bigger role for various forms of official financing, responsibility in this field." with the I.M.F. having a primary The prospects for further discussion of the many proposals in this area depend not only upon the political willingness of many of the same countries to make funds available in connection with any arrangements that might be agreed in principle. It should be remembered that the I.M.F.'s present Oil Facility with its comparatively modest $3.5 billion in resources required more than six months of intense discussions before it was agreed upon. Other possible means of financing countries' payments imbalances also received attention during the Annual Meetings. First, the G-10 countries agreed to renew with modifications the General Arrangements to Borrow, although some of the technical details have not yet been worked out. Second, on the enlargement of I.M.F. quotas in connection with the current, quinquennial review of quotas, the developing countries strongly Authorized for public release by the FOMC Secretariat on 8/21/2020 CONFDENTIAL(FR) -4- supported a general enlargement of 70-100 percent. countries spoke in favor of a significant or substantial enlargement of quotas, which might be as large as 50 percent. Hans Apol, Many of the developed on the other hand, increase in iternational German Finance Minister said that there was no need for a general liquidity; "the Fund as the guardian of the international monetary system should not, by its own actions, engender new inflationary pressures." The United States did not refer to a specific figure for quota enlargement, but Secretary Simon observed that the question should be considered "in light of today's needs and under present conditions of relative flexibility of exchange rates." The Interim Committee agreed to consider the question of quota enlargement, decision by February 8, which is scheduled for 1975. Third, on gold, both the Italians and the French spoke in favor of further steps facilitating countries' mobilization of their gold holdings. The French Minister of Economy and Finance, Jean-Pierre Fourcade, forcefully stated the French view that "the special status of gold should be eliminated, that is to say, it should be treated like any other monetary asset." He also argued that the I.M.F. should not be authorized to sell its gold in the private market. Secretary Simon stated the opposite view on this question. The Interim Committee agreed that it would review the role of gold in the I.M.F. Articles of Agreement in connection with the question of quota increases -- 25 percent of which heretofore have been paid in gold -- connection with other proposed amendments to the Articles. and in Authorized for public release by the FOMC Secretariat on 8/21/2020 CONFIDENTIAL (FR) Fourth, many representatives of developing countries gave their support for a renewal of SDR allocations. Speaking for Italy, Emilio Colombo expressed qualified interest in new SDR allocations, "at least to the extent that oil-producing countries indicate their willingness to accept them in payment for oil." The issue of SDR allocations, of course, is bound up with the issue of establishing a link between SDR allocations and development assistance, which also has been assigned to the Interim Committee. Except on the part of the French and a some representatives of developing countries, there was general disinterest at the Annual Meetings in promoting the role of the SDR and the general evolution of the inter- national monetary system. Nevertheless, the new Interim Committee consisting of Finance Ministers and Central Bankers was established. It met and elected John Turner, the Canadian Minister of Finance, as its chairman for two years. The evidence from the first meeting suggests that the Interim Committee may become a vigorous body that will be active in the supervision of the operation and evolution of the international monetary system. The first meeting of the new joint Fund/Bank Development Committee, was less auspicious. This ministerial committee has been assigned the task of dealing with the problems facing those developing countries most seriously affected by the present world economic situation. The difficulties faced by this enterprise were reflected in the wrangling that proceeded the selection of Henri Konan Bedie, Minister of Economy and Finance of the Ivory Coast, as its chairman and the selection Henry Costanzo, of the United States, as its executive secretary.
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