rigorous steps to bring its payments into equilibrium.

Accordingly some of these countries are prepared to argue that the international monetary system at the present time is experiencing a surplus of liquidity, not a shortage. This is perhaps the basis for the suggestion of General de Gaulle that the world should return to a goldstandard system. A return to a gold standard would imply a sharp curtailment of world reserves and world liquidity and would carry the threat of worldwide deflation. I need notfor this audience-spell out the detailed mechanism by which this would come about.

I mentioned Jacques Rueff, who recently expressed his support for a return to the gold standard in public statements in the United States. Recognizing that this alone would create dangerous deflationary pressures, he couples his proposal with the suggestion that the price of gold be doubled and that the United States then pay off its liquid liabilities to foreign central banks in gold at the new price. That would mean redeeming some $14.5 billion of dollar reserves of foreign official holders at a rate of $70 for an ounce of gold rather than the existing $35 per ounce. The United States would be left at the end of the operation with gold reserves near the present level, according to the new valuation, and would have wiped out its official liabilities to foreign monetary authorities.

Such a proposal is thoroughly unacceptable to the United States. It combines the proposal that the world once again accept automatic regulation of its money supply according to the vagaries of world gold production with the proposal that the implied and stated commitments of the gold exchange standard be repudiated to the advantage of a few and the disadvantage of many. It is easy to see how it might be appealing to the major gold-producing countries, including the Republic of South Africa and the U.S.S.R., and to some countries holding a high proportion of their reserves in gold. It would, of course, be discriminatory against countries which have kept a substantial fraction of their reserves in the form of reserve currencies. Our commitment to main

[Doc. II-94] 223

tain the fixed parity of $35 an ounce between gold and dollars is basic to the stability of the world monetary system. President Johnson has reiterated our unchanging determination to maintain this parity.52

We share fully, however, the European view that our balance-ofpayments deficit should be promptly corrected. We do not believe that the existence of the present monetary system has weakened our resolve to eliminate our balance-of-payments deficit. We have, however, insisted that the deficit be eliminated by measures which would have a minimum impact both on the rate of economic growth in our own country and on the continued economic prosperity of the rest of the free world. We have ruled out measures which would have denied our responsibilities in defense of the free world or in the economic development of less developed countries-and we have done so in the interest of free men everywhere. Our deep reluctance to adopt more restrictive monetary or fiscal policies at home has derived from the unshakable conviction that a strong and growing economy in the United States is a prerequisite both to lasting correction of our balance-of-payments difficulties and to continued prosperity in the Western World.

I shall not digress at any length to review the extent to which our balance-of-payments position has, in fact, been strengthened in recent years. The splendid record of price stability which we have maintained through 50 months of steady economic growth has established for us a strong competitive position in world trade, and our trade balance is highly favorable. We have reduced the balance-of-payments impact of our military and foreign aid operations without retreating from our commitments in these areas. More recently, measures have been taken to dampen the outflow of capital from the United States by means of the voluntary cooperation of the banking system and the business community. The United States will, however, continue to be an important source of productive capital.

82 See post, doc. XI-3. 83 See ibid.

86

In the period under review, the Board of Governors approved proposals for general and special increases in Fund quotas. The Fund continued its studies on the general problems of international liquidity and conducted its annual consultations with Article XIV and Article VIII countries. Financial assistance made available by the Fund during the first half of 1965 on short-tomedium term to meet balance-ofpayments deficits of member countries amounted to approximately $2.4 billion, including $560 million in standby arrangements. Australia and Costa Rica accepted the obligations of Article VIII. Initial par values were established for the currencies of Burundi and Trinidad and Tobago.

$4 79 Stat. 119. Public Law 89-57, approved June 30, 1965, appropriated the funds for the increase in the U.S. IMF quota (79 Stat. 204).

85 H. Doc. 449, 89th Cong., May 31, 1966, pp. 2-9.

se For the text of the Articles of Agreement of the International Monetary Fund, July 22, 1944, see A Decade of American Foreign Policy: Basic Documents, 19411949, pp. 273-304.

MEMBERSHIP AND RESOURCES

There was no change in the number of members of the Fund during the period under review. However, as the result of increases totaling $429.2 million in the quotas of 13 member countries which became effective in the current period, aggregate quotas of the 102 member institution on June 30, 1965 amounted to $16,046.1 million (see app. table D-1). Most of the quota increases were approved under the terms of the Fund's decision on the compensatory financing of export fluctuations, which provides that the Fund "is willing to give sympathetic consideration" to requests for such increases from countries exporting primary products, especially those with relatively small quotas.89

88

The Board of Governors approved the terms and conditions for the admission to membership of Malawi and Zambia, with quotas of $11.25 million and $50 million, respectively.

INCREASE IN FUND QUOTAS

In the course of its continuing studies of the functioning of the international monetary system and of its role in that system, the Fund in its 1964 annual report concluded that there was a case for an increase in Fund quotas and that the various aspects of the quota increase question should be examined at an early date. At its 19th annual meeting in Tokyo, the Board of Governors of the Fund requested the Executive Directors to consider the question of increasing the quotas of Fund members and to submit appropriate proposals to the Board of Governors. A report entitled "Increases in Quotas of Fund Members: Fourth Quinquennial Review," submitted to the Governors in February 1965, proposed (1) a general increase of 25 percent in all quotas and (2) special quota increases for 16 members. The Council wholeheartedly supported the proposed expansion in Fund quotas not only because the Fund's credit facilities have been directly useful to the United States

See ante, doc. II-84.

**See American Foreign Policy: Current Documents, 1963, pp. 203–208.

Malawi became a member of the IMF, July 19, 1965. Indonesia withdrew from membership, Aug. 17, 1965, but rejoined the IMF, Feb. 21, 1967.

*See American Foreign Policy: Current Documents, 1964, p. 272.

but also because of its belief that the increased Fund quotas will contribute importantly to the economic health of the free world." Both proposals were adopted by the Governors on March 31, 1965, by more than the required four-fifths of the total voting power of the Fund.

93

Members may consent to increases in their quotas at any time up to September 25, 1965, unless this period is extended by the Executive Directors."2 92 Before any increase under the proposals can become effective, members having not less than two-thirds of total quotas on February 26, 1965, must notify the Fund of their consent. On the assumption that all of the quota increases become effective, total quotas will be increased from about $16 billion to approximately $21 billion. In accordance with the Fund's Articles of Agreement and the proposals mentioned above, each member increasing its quota must pay an additional subscription equal to the increase in quota, of which 25 percent is payable in gold and the balance in its own currency.

While some countries will make the necessary gold payments from their own reserves, other members would normally purchase the gold from reserve currency members, particularly from the United States and the United Kingdom. In order to mitigate the impact of the gold purchases in these two currency reserve centers, the Fund has provided that members finding it difficult to make prompt payment of the 25-percent gold portion, may request an exchange transaction which could be used to purchase gold from the

91 See H. Doc. 122, 89th Cong., Mar. 18, 1965.

92 Extended to July 31, 1966.

93 "With effect from Feb. 23, 1966, the Fund determined that members having not less than two-thirds of the total quotas in effect, Feb. 26, 1965, had consented to increases in their quotas, in accordance with these Resolutions. Consequently, the increases in the quotas of those members that had consented and had paid their additional subscriptions on or before Feb. 23, 1966, became effective on that date. The increases of members that have consented since that date became effective upon payment by the member concerned of 25% of the amount of the increase in gold and the remainder in the member's own currency." (International Monetary Fund, Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1966 (Washington, IMF, n.d.), p. 33.)

monetary authorities of the (nonreserve currency) member whose currency was drawn. Up to the equivalent of $150 million of such exchange transactions would be made in currencies which the Fund would then replenish by the sale of its gold to these members up to the amount of the drawings. In addition the Fund is prepared to place on deposit up to the equivalent of $350 million in gold with the Fund's depositories in the United States and the United Kingdom. Since the gold so deposited will become part of the United States or United Kingdom monetary reserves, the result will be to offset the effect of any gold purchases on the gold holdings of these countries.

94

On June 2, 1965 (Public Law 8931), the U.S. Governor of the Fund was authorized to consent to an increase of $1,035 million in the quota of the United States in the Fund; and on June 30, 1965 (Public Law 89-57), the necessary funds were appropriated by the Congress.95 In advising the Fund of U,S. consent to the increase, Secretary Fowler stated that "the action of the U.S. Government demonstrates the importance which it places on insuring that adequate resources shall be available to the Fund so that it can continue to play a vital role in the international monetary system."

96

The United States paid 25 percent ($258.75 million) of the increase in its quota in gold on June 30, 1965, and issued a letter of credit for the remaining 75 percent ($776.25 million). As a result of its gold payment, the United States will receive a reserve asset in an equivalent amount in the form of virtually automatic "gold tranche" drawing rights on the Fund. No expenditures under the letter of credit will be required in the foreseeable future, and the quota increase will therefore have no early effect on the U.S. international reserve position or upon the U.S. balance of payments. INTERNATIONAL MONETARY SYSTEM

In the wider context of international liquidity, the International Monetary Fund and the Ministers and Governors of the Group of Ten countries participating in the Gen

eral Arrangements to Borrow continued their studies with respect to the nature and functioning of the international monetary system and its possible future needs." Both groups recognized that the rate of increase of gold and foreign exchange reserves might in the future fall short of requirements in terms of the prospective growth in international trade and payments.

The Ministers and Governors of the Group of Ten countries suggested in their statement of August 1964, that the need for larger international liquidity might be met by an expansion of credit facilities, and, in the longer run, might possibly call for some new form of reserve asset. They approved arrangements made by their Deputies for a study group, under the chairmanship of Mr. Rinaldo Ossola, of Italy, to examine various proposals regarding the creation of reserve assets either through the IMF or otherwise. The study group's report was published in August 1965. The study group examined the technical aspects of the various proposals referred to them, clarified the principles underlying the alternative approaches, and assembled the elements necessary for an evaluation of the various proposals by the Deputies. Three broad classes of proposals were studied: (a) Creation of reserve assets by a group of countries; (b) Creation of reserve assets through the IMF; and (c) Schemes which provide holders of currency with an alternative asset. Members of the study group acted as individual experts rather than as representatives of their respective governments, and the views indicated in the report were not necessarily representative of official positions of governments.

Many divergencies of view on the implications of the various proposals for reserve creation were recorded in the study group's report, which listed four fundamental issues in which the differences were reflected:

(1) the question of a link between gold and a new reserve asset, the closeness of that link, and its effects on the existing system;

97 See American Foreign Policy: Current Documents, 1964, pp. 271-277.

98 Text ibid., pp. 251-264.

90 Report of the Study Group on the Creation of Reserve Assets, issued Aug. 10, 1965.

(2) the width of membership for purposes of management and distribution of the assets;

(3) the role of the IMF as regards deliberate reserve creation;

(4) the rules for decisionmaking concerning the creation of reserve assets.

The August 1964 Ministerial Statement of the Ministers and Governors of the Group of Ten, mentioned above, also recognized that the smooth functioning of the international monetary system depends on the avoidance of major and persistent imbalances and that the process of adjusting economies to balance-of-payments equilibrium and the need for international liquidity are closely interrelated. For this reason the statement requested Working Party 3 of the Organization for Economic Cooperation and Development (OECD) to undertake studies on the balance of payments adjustment process, including an exploration of whether standards could be formulated on the contribution of national policies to adjustment, against which the performance of countries could be appraised.

At a meeting in February 1965, Working Party 3 decided to appoint

a special working group on the adjustment process, charged with the task of preparing a draft report for the working party, on the questions suggested by the Group of Ten Ministers. The first in the series of meetings of the working group was held at the end of March 1965.

EXCHANGE RESTRICTIONS

AND PAR VALUES

In accordance with Article XIV, section 2 of the Fund agreement, member countries which have elected to avail themselves of the transitional arrangements permitted under that article are required to consult with the Fund annually on the further retention of their restrictions on payments and transfers on current international transactions. During the Fund's fiscal year 196465, consultations with 43 countries under Article XIV enabled the Fund to examine the economic and financial problems that have given rise to restrictive and discriminatory practices and to assist in their elimination. Voluntary consultations with 22 members that have already accepted the obligations of Article VIII, section 2, 3, and 4, of the Fund agreement have helped to achieve a greater degree of cooperation on international monetary problems. Discussions with Article VIII countries were initiated in May 1961.