Foreign Relations of the United States, 1969–1976
Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972, Document 111
111. Volcker Group Paper
LONG-TERM ASPECTS OF U.S. INTERNATIONAL MONETARY
AND EXCHANGE POLICIES
This subject is discussed in this memorandum under these headings:
1) Activation of Special Drawing Rights
2) Gold Price Problems
3) Interchangeability of Dollars, Gold and Other Reserve Assets
4) Exchange Rate Policies and Principles—Fixed Parity or Limited Flexibility
2) Gold Price Problems. — While an early activation of the SDRs would help to set at rest speculation for an increase in the official price of gold, we cannot be sure that an aggressive devaluation by the French would not bring this problem to the center of the stage. Minister Schiller's continued references to a “realignment of currencies” might also envisage a change in the official monetary price of gold, and hence references to it continue to keep up the hopes of speculators.
The Schiller realignment problem might become serious if the Germans and other Europeans were to delay activation of the SDR and give the French support for a rise in the official gold price. We hope that this technique will not be adopted, and Schiller indicated last November that he was in favor of activation of the Special Drawing Rights. But it seems possible that he is seeking a general realignment of currencies to facilitate and cover a Deutschemark revaluation, and it is reported that he has expressed the view that the dollar is overvalued.
An aggressive French devaluation, which carried with it at least some depreciation of the pound sterling and other European currencies, could present a problem to the U.S. in choosing its future gold and exchange policy. This would be especially true if Germany, Italy, and Japan, for example, were to follow the French with some depreciation. Presumably these strong currencies would move only if the French depreciated by such a large percentage that they would be fearful of the impact on their trade. However, if by any chance there were such a general depreciation by the major countries, the United States would seem to face a decision on these basic alternatives:
a) Elimination of full convertibility and aggressive negotiations with other countries on mutually acceptable exchange rates for all major currencies in terms of the dollar. Such an aggressive negotiation might have to be backed up by threats to make illegal transactions in dollars at any other than a mutually agreed exchange rate.
b) The adoption of a general system of export subsidies and import taxes to offset foreign depreciation or even gain some advantage for U.S. exports in terms of some countries.
c) Depreciation of the dollar in terms of gold and other currencies, which would imply a rise in the official monetary price of gold.
3) Interchangeability of Dollars, Gold and Other Reserve Assets. —Assuming that the problem of the gold/dollar relationship is not brought to a head by some monetary crisis, as mentioned in the preceding section, there is a more fundamental question of the long-term U.S. policy with respect to convertibility of dollars into gold. Various approaches have been suggested which have the effect of limiting the potential strain of convertibility. One of these is the freezing in some way of foreign dollar balances. One is the reserve settlements account of Mr. E.M. Bernstein, which is an advanced method of eliminating convertibility that would present very difficult if not impossible negotiating problems. The third is a continuation of the rather informal way in which convertibility has been to some extent limited through central bank cooperation, the re-channeling of reserves into the international money market, through commercial banks, and other ways of holding down the growth in official dollar reserves.
The fourth approach is the suggestion for a dollar bloc and a gold bloc, with a flexible exchange link between the two.
These various proposals may be judged against the long history of monetary evolution. The convertibility of money into a metallic asset has been steadily restricted until it no longer exists domestically in most advanced countries. For a number of years convertibility into gold has been limited to international transactions. Last year, the two-tier system took a further step, and eliminated the convertibility of dollars into gold at a fixed price for foreign private holders of dollars.
What remains is the convertibility link for foreign monetary authorities. It is this link, and the possible loss of gold associated with it, that provides the major remaining impetus to international adjustment arising out of the balance of payments. But this link also threatens the stability of the monetary system, by permitting a run on the U.S. gold reserve on the part of foreign central banks.
Perhaps one of the most important long-term problems facing the U.S. is how to move out of this commitment in a graceful manner without causing undue disturbance to the monetary system and with a fair measure of international approbation, at some time in the future. It is not yet clear whether this can be done, and a breaking of the link may have to come in the context of some crisis and a threatened run on the dollar.
One possibility, over time, is that the nations of the world come to accept Special Drawing Rights in lieu of gold when they convert dollars into other reserves. Such preference for SDRs over gold may be a long time in coming. The preference of many monetary authorities for gold would be to some extent weakened if it became clear that the commodity gold price could dip below the official price of $35 per ounce.
A partial approach to the problem of reducing our vulnerability to convertibility would be the freezing of dollar balances in some form. Most experts believe, however, that this would not be acceptable to foreign countries without some kind of commitment to the effect that the U.S. would no longer have the flexibility of settling its deficit initially with dollar liabilities instead of reserve assets. There is a feeling in many quarters that it would be dangerous for the U.S. to give up the more favorable bargaining position which it now has, when it can pay out dollars initially and then discuss with foreign monetary authorities the various techniques for handling these dollars if the central bank does not want to hold them in its reserves. The reason for this feeling is that, with the U.S. unable to create new reserves in this form, the European countries might use too harshly their veto over the creation of Special Drawing Rights so that the growth in reserves that would be permitted might fall heavily short of the amounts needed to prevent a steadily tightening shortage of world reserves.
The same considerations apply to the Bernstein plan, which makes no allowance for the role of the U.S. as a continuing reserve center with the potential power to create additional reserves in the form of dollar liabilities. Under that plan, there would be no increase in dollar liabilities held as reserves.
The U.S. still has to develop a clear position as to its long-range objective with respect to the maintenance of convertibility and the interchangeability of dollars and gold...
[Mrt: A dollar block and Gold block already discussed 40y ago.]
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