-Comparative merits of a general increase in quotas, of selective increases, or of enlargement of the GAB.

-Effect of the above on the liquidity of the Fund.

51. We are all agreed that appropriate credit facilities, particularly through the IMF, provide an element of strength to the international monetary system through financing imbalances while assisting in the process of adjustment. In order, therefore, to provide resources for the Fund in the years ahead, which will no doubt bring a further growth of the world economy, we suggest that the Ministers and Governors of the Group may wish to give their support to an appropriate general increase in quotas during the quinquennial review of the adequacy of Fund resources. We also suggest that there may be some cases in which the quotas of individual members may need to be adjusted on a selective basis.

52. We considered the place of gold in the IMF. Over its whole history, the Fund has had gold receipts of $4.2 billion from subscription payments, repurchases, and charges. The Fund has used $1.1 billion of gold to replenish its holdings of currencies, of which $500 million was used for this purpose in 1961, leaving $3.1 billion. Of this, the Fund has invested $800 million, the remainder of $2.3 billion being the Fund's present gold holdings.

53. Various functions have been attributed to quota subscriptions in gold: (a) to provide the Fund with a liquid resource available, if needed, to acquire appropriate currencies necessary for its operations;

(b) to measure the initial amount of drawing rights to which it is the Fund's policy to allow members access virtually at will; and

(c) in some cases, to help moderate any propensity to ask for larger quotas than might be justified.

54. While payments of gold subscriptions to the Fund can reduce a country's gold reserves, its over-all reserve position may be said to remain unchanged if it counts the gold tranche drawing rights which it acquires as part of its reserves. But contributions of gold to the IMF made by non-reserve countries who acquire gold from a reserve currency country can reduce the gold holdings of the reserve center and, in that way, can actually diminish world reserves in the aggregate. In view of these considerations, although we are agreed on maintaining the established principle of payment in gold, attention should be given during the quinquennial review to methods of minimizing the impact, particularly on reserve currency countries, of transfers to the Fund of gold from national reserves.

55. The GAB, to which reference has already been made, expire in October 1966. Any decision on renewal or modification must be taken not later than October 1965, and will no doubt be related to any increases in IMF quotas, general or selective, that may be agreed. We therefore suggest that a study of this subject should be made over the coming months, in the light of possible action concerning quotas in the Fund, and that a report be made to the Ministers and Governors well in advance of October 1965.

Document II-56

French Observations and Recommendations on International Monetary Fund Policy: STATEMENT MADE BY THE FRENCH MINISTER OF FINANCE (GISCARD D'ESTAING) AT THE NINETEENTH ANNUAL MEETING OF THE BOARD OF GOVERNORS OF THE IMF, TOKYO, SEPTEMBER 9, 1964 (EXCERPTS) 90

Twenty years after the creation of our institutions, promoting economic development and international monetary equilibrium is still a major concern of

Text as printed in International Monetary Fund: Summary Proceedings of the Nineteenth Annual Meeting of the Board of Governors, September 7-September 11, 1964 (Washington, IMF, 1964), pp. 203-209. M. Giscard d'Estaing was Governor of the IBRD for France. The occasion was the annual discussion by the Fund of the IBRD, IDA, and IFC.

the community of nations. The Bank and the Fund are to be commended for unceasingly intensifying and diversifying their activities during this period. But

the institution created at Bretton Woods were not asked to provide one final and unchangeable solution for one specific problem; their task was to continue to contribute both to the growth and to the stability of the world economy, throughout the difficulties that would inevitably arise.

In order to fulfill this mission, our institutions had to call on intellectual as well as physical and financial resources. Some kinds of progress can be achieved only through analytical and creative thinking. This type of contribution is particularly needed at the present stage of development of the world economy. In recent years, our efforts have been concentrated on mobilizing resources to accelerate the development of nations which are in the process of industrialization. This will be the first point of my remarks.

But, I believe that the functioning of the international monetary system, which is the main problem to be reviewed this year, requires a special effort of intellectual insight.

The examination of the problems raised by the equilibrium and functioning of the international monetary system has to be made broader and still more accurate. Last year we stressed the usefulness of this study.

93

Since then, a thorough analysis of the international monetary system has been made by both the Board of Directors of the Fund 2 and by the Group of Ten." These two organizations have performed a useful task. They have provided us with a better knowledge of the functioning of the international monetary system which has led to constructive recommendations.

Generally speaking, it has been agreed that there was no need to modify the Articles or the policies of the Fund." On the other hand, it has appeared necessary to scrutinize the kinds of cooperation existing at the present time among the main currencies. From this point of view, the small Group of Ten has proved to be a particularly apt study group, and its report is of special interest.

As might be expected, the conclusions of the Group of Ten are the result of a compromise. We accepted them in a spirit of conciliation, while putting these conclusions in the light of what we, on the French side, consider to be the essential objectives.

I will recall them here, with candor, clarity, and simplicity.

The present system of international payments is an empirical creation. Empirical schemes have their own merit, since they necessarily result from an adaptation to the pressure of circumstances. But there is no evidence that such schemes can spontaneously take on a form that will permit them to meet, over a period of time, the requirements of the situation to which they are applicable.

Such is the case in regard to the present gold exchange standard. Although, as has been emphasized, this standard has been able to meet, with limited adjustments, the needs of a period of exceptional world economic expansion, it has nevertheless shown some signs of inadequacy and deviation recently, and the least we can say is that it has not prevented the inflationary trends which, during the last few years, have affected large areas of the industrial world.

These inadequacies and deviation may be explained by the serious imperfections in a system which allows the reserve currency countries to finance lasting balance of payments deficits without the creditor and debtor countries being fully aware of this fact and without the adequate corrective mechanisms being necessarily implemented in due time.

In this way, excessive facilities may be granted which may lead to the spreading of international inflation. It may even lead to the strange paradox that, since this system in practice permits the deficits of the reserve currency countries to be financed without limit, the creditor countries are somehow invited to "create a deficit" in order to compensate for the outflow of reserve currencies, which is a phenomenon for which they have no responsibility whatever.

Text of the Articles of Agreement of the Fund is in A Decade of American Foreign Policy: Basic Documents, 1941–49, pp. 273–304.

219-262-67

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Doc. II-56

Moreover, as was excellently stressed yesterday by the Governor for the Netherlands, the creation of owned reserves should clearly not be linked to changes in the balances of payments of the reserve currency countries. There may very well be no relationship between the amount of the reserves which is deemed desirable and the positive or negative trend in the external settlements of a country, important as this may be. In the same way, there may very well exist no concordance of interest between the national policy of a country which, for quite justifiable reasons, tries to curtail its money supply, and the total amount needed for owned reserves in the world economy.

The imperfections of the present system lead us to hope that it will develop in a way which, from our point of view, would be as follows:

The world monetary system must be set in concentric circles: the first one being gold, and then, the second, if necessary, recourse to deliberate and concerted creation of either reserve assets or credit facilities.

The inner circle is gold.

Experience in recent years has shown us that, aside from any theoretical preference, gold remains the essential basis of the world payments system.

This is true at the psychological level. Indeed, public opinion, by a kind of universal consensus, attaches a very high price to gold; it is even sometimes inclined to reappraise its judgment in regard to the strength of the various currencies in relation to changes in the gold holdings in their reserves. This is also true of governments, and in proof of this, it is sufficient to allude to the problems raised by the reserve currency countries regarding the conditions affecting gold tranche subscriptions on the occasion of the next increase of Fund quotas.

The importance of the role of gold does not arise from any charm inherent in the metal itself, but from the following fact: as long as the present situation prevails, with separate national sovereignties throughout the world acting freely in the monetary field, without recourse to arbitration, and certainly not subject to coercion, reference will have to be made to gold, the only monetary element outside the scope of government action.

While noting the basic role of gold, we do not believe that the pace at which it is mined will spontaneously adjust its volume to the needs of a world, the rapid technological transformation of which may be observed here more clearly than anywhere else.

Thus it may be necessary to seek out supplementary sources for supplying owned reserves.

The basic distinction has rightly been made between credits for balance of payments support, such as those so usefully granted by the Fund under M. Schweitzer's inspiring management, and the creation of fiduciary means for supplying reserve assets.

Internally, the action of the Fund might be compared to that of a bank which grants credits to help its customers bridge over temporary difficulties. On the other hand, the creation of reserve assets would be akin to the role of a central bank whose operations are geared to the general needs of the economy.

If and when fiduciary means must be added to gold, they should be issued in accordance with objective rules and through mutually undertaken action.

I do not wish, at this juncture, to discuss the technicalities of such a system nor the choice of the appropriate administrative body. In my mind, three considerations should underlie the studies to be made on this subject:

(1) If such reserve assets are, over the long run, to be added to, and possibly substituted in part for gold in its present function, they must be of an objective nature, governed by strict rules concerning their creation and volume.

(2) As there is always temptation to accumulate an oversupply of world liquidities, cautious regulations would be required in order to assess the need for such a creation and to adjust its amount.

95

'The statement by the Governor of the IMF for the Netherlands (Holtrop), Sept. 8, is printed in the source text, pp. 62–70.

(3) The group of those with whom would rest the responsibility and burden for such operations should act in close cooperation with the Fund and with due regard to the interest of the world community as a whole.

To sum up: First, under present circumstances, gold remains, in our minds, the basis of the international payments system.

Secondly, if the need were to arise for an increase in the amount of owned reserves, there should be a concerted and limited recourse to additional fiduciary means, instead of to the uncertainties and instabilities of the gold exchange standard. Such a substitution should be brought about gradually and not by disrupting the present system which, under present circumstances, provides an adequate safeguard for the functioning of international payments. Indeed, it is normal that various central banks will go on keeping, in their reserves, dollars, pounds sterling, or French francs, owing to the particular financial relationship they maintain with the countries issuing such currencies.

Having thus set forth our general views regarding the future of the international monetary system, it seems to me that the spirit in which we envisage the implementation of the two main practical recommendations of the Group of Ten, namely, the establishment of a multilateral surveillance and the increase in Fund quotas, will be readily understood.

(1) Multilateral surveillance appears to us an essential step toward straightening out the international monetary system. It should give us the means of avoiding the misuses which may occur within the framework of the gold exchange standard. Indeed, the noticeable reduction of the U.S. payments deficit has lessened the worrying aspect of the situation which prevailed in this field a year ago. But what has happened once may happen again, and, generally speaking, we must avoid the use of short-term facilities to finance deficits which are actually of a more lasting nature.

Implementation of this surveillance will call for much caution, but also for much candor. Much caution, because these are delicate operations involving the functioning of the exchange market and may give rise to serious psychological reactions. Much candor, since, obviously, the system would be hampered from the start if governments or central banks permit their partners to ignore major developments which might affect the functioning of the international monetary system.

(2) To be quite frank, the new increase of the Fund's quotas which is recommended by both the Board of Directors of the Fund and by the Group of Ten did not seem to us to respond to an evident and urgent need." We have never concealed the fact that we do not consider the increase of international liquidities to be the main target of the studies which have been undertaken. However, nobody could pretend that the Fund's resources should remain fixed at the level established five years ago. Since we have the opportunity, under the quinquennial review, to reconsider the level of Fund quotas, we are willing to go along with a moderate increase of quotas, which should not exceed 25 per cent. Of course, if some individual quotas have to be adjusted, these adjustments should be limited to cases where the present quotas are clearly out of line with the economic situation of the countries concerned.

The principle of the payment in gold of 25 per cent of the increase should be firmly maintained. In our opinion, this quota increase could be implemented, for instance, in two stages: the first one taking place just after the parliamentary ratification of the final decisions; the second one, for instance, one or two years later.

The implementation of this set of measures is a step in the evolution of the world monetary system toward a more rational and realistic structure. We will make our contribution both to implementing those measures and to carrying on actively the studies which will prolong them.

The process of life is indeed slow; but, even so, it seems that one of the features of our times is that the pace of facts is nearly always ahead of the pace of thought.

See footnote 13 to doc. II-58, post; also post, docs. XI-2-9.
See post, doc. II-58.

The monetary matter is too important, its management may be too dangerous or too rewarding, for us to leave this field-a product of man's ingenuity-as one in which thought would not precede and master the facts. . . .

Document II-57

Comparison of United States and French Positions on the Policies of the International Monetary Fund: REPLIES MADE BY THE SECRETARY OF THE TREASURY (DILLON) TO QUESTIONS ASKED AT A NEWS CONFERENCE, TOKYO, SEPTEMBER 11, 1964 (EXCERPTS) 98

I would be glad to spell out our differences with the French proposals 99 which are far more fundamental than the details of a composite unit. I think our basic differences can be summed up in four categories. In the first place, we believe strongly in the multilateral framework for handling problems of world liquidity. We believe that the Group of 10 countries was an important and is an important group for discussion to advance the final decision, but it is not, and we have never considered it an action group to take decisions regarding a matter that is as important for the rest of the world as the value of international liquidity. We think these decisions should be taken within the Fund and they should be multilateral. The French position looks. clearly to the establishment of a small group of presumably the 10 to take these decisions and to decide for the rest of the world how much liquidity they should have. We strongly reject that thesis since we believe that this is a matter of interest to all the countries of the world and we very strongly support the position taken by the Managing Director of the Fund, Mr. Schweitzer, in this regard. That's our first basic objection.

Our second point is that the French proposal is basically designed to be restrictive în nature and to limit the amount of additional liquidity that may be available. We do not think that that is the problem. We do agree with the French view-I think everybody agrees with this too that the world should not be dependent solely on deficits, payment deficits in the reserve currency countries for the supply of liquidity. Some additional means will probably have to be found in the future to make an adequate supply of liquidity available as world trade grows and we think that the problem is to find in adequate time a new way and a new source of making additional liquidity available to the world as the U.S. balance of payments deficits comes to an end.3 And this is quite contrary to the basic French thesis.

98 Department of the Treasury files. Secretary Dillon represented the United States at the annual meeting of the IMF in his capacity as Governor of the Fund for the United States.

The question had addressed itself to U.S. differences with France "particularly in reference to the currency rate of the unit of the Monetary Fund."

* See International Monetary Fund: Summary Proceedings of the Nineteenth Annual Meeting of the Board of Governors, September 7-September 11, 1964 (Washington, IMF, 1964), pp. 15-29, for the text of Mr. Schweitzer's remarks. upon presentation of the 19th Annual Report of the IMF.

3 See footnote 13 to doc. II-58, infra; also post, does. XI-2-9.