MONTHLY REPORT

• Document Type: CREST
• Collection: Library of Congress
• Document Number (FOIA) /ESDN (CREST): LOC-HAK-320-4-2-9
• Release Decision: RIFLIM
• Original Classification: U
• Document Page Count: 6
• Document Creation Date: January 11, 2017
• Document Release Date: June 4, 2010
• Sequence Number: 2
• Publication Date: January 15, 1976
• Content Type: MEMO

No Objection to Declassification in Full 2010/06/04: LOC-HAK-320-4-2-9
DEPARTMENT OF STATE
BRIEFING MEMORANDUM
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ON FILE DOS WAIVER
INSTRUCTIONS APPLY
TO: The Secretary
FROM: EB Thomas O. Enders'
Monthly Report
The Jamaica Monetary Accord and Beyond
The monetary agreement wrapped up at Jamaica
embraces two sorts of decisions. First, of immediate
importance, are the measures which will substantially
enlarge the availability of IMF balance of payments
support, particularly to developing countries. These
measures include the liberalization of the Compensatory
Financing Facility (the main element of your Develop-
ment Security Proposal), the Trust Fand, and to
enlargement of access to normal IMF credit drawings.
The decisions on these matters represent a highly
successful conclusion to our strategy for dealing with
the financing needs of the developing countries over
the critical next few years. We have already analyzed
their significance in a separate report to you. -
The second category involves decisions, mostly
embedded in the package of amendments to the IMF
Articles of Agreement, about the fundamental structure
of the international monetary system. These decisions,
in fact have themselves settled very little about the.__.
shame of the future world mone tary_ gvstem Para
d o x i al.ly_this could be considered the essence of_
their major achievement in the area of long-termreorm;
kau roae~areas re;naa n iri wFiicTri tYae struggle over
important features of the system is likely, after some
pause, to be renewed.
In geopolitical terms, the issues that have been
resolved were those that had separated the-
industrialized countries---especially the United States
and France. The issues remaining outstanding are ones
which to a greater extent involve elements of
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north-south conflict. The package did provide extremely
important benefits to developing countries--the short-term
measures referred to above--but it left relatively
untouched some basic issues involving longer-run LDC
interests.
Gold and Exchange Rates: The essence of the
U.S.-French compromises on the two central elements of
the monetary reform agreement--exchange rates and gold--
is to allow the ultimate shape of the system to be
determined by evolutionary forces. In each case, the
provisions are consistent with a broad range of eventual
outcomes. The French essentially gave up their efforts
to give the legal framework of the system a strong tilt
in favor of a particular exchange-rate system--a
generalized structure of fixed par values. At the same
time, the more stringent U.S. proposals for agreements
limiting the use of gold as a means of settlement among
central banks were successively abandoned. Thus the
final compromise has a kind of symmetry in its
permissiveness.
There is less symmetry, however, in the most
likely eventual outcome in these two areas. In both,
the bargain seems very likely to turn out well from the
current U.S. viewpoint. Within the agreed IMF
Article IV on exchange obligations, countries may freely
choose the exchange arrangements best suited to their
own circumstances, so long as they adhere to general
principles of good behavior. One section, to be sure,
provides for the possibility of a re-establishment of
a general system of par values. But an 85 percent
majority of voting power would be required (the same
majority as required for amendment), and individual
countries would still be able to opt for alternative
arrangements. Even apart from the current U.S. attitude
and its veto position, it seems extremely unlikely that
this provision would ever be activated. Instead,
countries will pragmatically choose a variety of
exchange arrangen.snt3, depending on their circumstances,
as they do now. These choices could vary over time.
For instance, countries becoming increasingly inter-
dependent and achieving close integration of economic
policy may well find greater advantages in mutual rate
stability and form new or expanded joint floating
arrangements. However, for larger and relatively
more self-sufficient countries--and certainly between
'major country groupings--the advantages of rate
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3
flexibility will --remain clear. And the United States
will be able to contfii e to reap the advantage of
that flexibility (wh&.ch we have enumerated in a previous
report) as long as it desires to do so.
The ultimate outcome on the role of gold in the
system may be less easy to forecast, but vital U.S.
interests are also less clearly at issue. To be sure,
gold has been removed from its central operational
role in the IMF, and this is sure to be permanent.
Gold could, however, conceivably be reactivated as a
major means of official transactions among central
banks, if there were to be a strong desire to do so.
The present agreements among the G--IO countries (no
pegging of the price of gold, and a global ceiling on
the volume of official holdings) discourage, but
certainly do not preclude this possibility; in any
case they are temporary 2-year agreements. Nevertheless,
it seems unlikely that official gold transactions will
become commonplace. Certainly, the current attitudes
of most countries are-not favorable to such a result.
With fluctuating market prices of gold, it will be
difficult and cumbersome to arrive at satisfactory
pricing arrangements for official transactions. The
possibility of substantial disposals of IMF and national
(including U.S.) stockpiles of gold heighten
uncertainties. Attempts to peg the market price would
probably not prove to be worth the effort. In sum,
official gold transactions are likely to be limited to
occasional cases where an individual country has a need
for substantial liquidation beyond the capacity of the
private market.
The Dollar and the SDR: Given this limited
prospect for gold, it still remains unclear how the
reserve asset system will evolve over the longer term.
For the t ms being, of course, the dollar remains the
ominant_ i n 7-nat ti-onaJ -r-eser.ve-a-s set. The SDR is
cir1y being put at the center of the system as common
denominator, but it is still a very long way indeed
from replacing the dollar as the principal reserve asset.
Despite the earlier agreement in principle that the rol.e
of both gold and reserve currencies should be reduced in
favor of the SDR, there is no agreement on how this is
to be done. The U.S. (Treasury), in fact, is backing
away from its agreement to the earlier language on the
reduction of the role of.reserve currencies (on the
ground that the premises of the earlier agreement have
been altered by the adoption of floating rates). It is
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,now taking a distinctly unfriendly attitude towards
proposals such as an IMF substitution account that
would replace official reserve holdings of national
currencies and/or gold with a special issue of SDRs.
We are not likely to be pressed hard for action on
this residual issue of monetary reform for awhile.
Active pressure from the other industrialized countries
has almost completely subsided, possibly as the result
of adamant U.S. opposition and higher priorities in
other areas of the monetary agreement. However, the
developing countries are continuing to keep the issue
alive, for reasons explored below. This issue, and
other issues related to longer-term LDC objectives in
the monetary area, may remain quiescent for a while
in the relatively decorous monetary groups. But they
will be re-emerging in the main north-south fora such
as UNCTAD and possibly the CIEC.
LDC Interests in Remaining Monetary Issues: Two
main continuing LDC objectives in the monetary area
stand out. The first is related to their desire to
obtain a continuous, assured flow of additional develop-
ment financing on favorable terms, free from political
or economic policy strings and from the vagaries of
national legislative appropriations. One of the central
proposals to achieve this goal is to tap the potential
in the creation of international liquidity through
creation of additional SDRs--i.e., the SDR-aid "link"
proposal. This desire is thus closely related to LDC
positions in favor of reducing the reserve asset role
of gold and the dollar in favor .of the SDR.
The LDCs have strongly protested the relaxation of
barriers to the activation of official gold holdings at
market prices. The reasons are obvious: LDCs generally
hold-proportionately much less gold in-their reserves
than do the developed countries, and the expansion in
liquidity through activation of gold greatly reduces the
prospect for additional SDR creation. of course, the
gold agreement had its short-run benefits, particularly
the financing of the Trust Fund. Moreover, under the
amended Articles, it will be'possible to tap the
remainder of IMF gold for LDC purposes again. But the
LDCs will continue to work against gold as a freely
usable reserve asset.
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lloldangs would 'be in the interests of the system as
who e, may be that our long_ly oYppasition tohe_
DR-aid "link"*sell_?end-in-terrns_~f;.the best .
interests of the system. However, all of these
propositions require further exammna ion an e a e_
c1 S.'] a at there is no conv_incxnq case - jad
at the re la moment n dollar-s-by,D .s_-.s~.o_f
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LDC interests in the role of the dollar are in
fact mixed. Many LDCs have found it quite advantageous
to hold dollars, in terms of convenience, interest
earnings, and maintaining financial ties in New York.
On the other hand, LDC groups, in their formal statements,
continue to call for the replacement of the dollar with
a "truly international reserve asset." The rationale
is sometimes expressed in terms of achieving greater
international control over liquidity creation or. in
terms of reducing the scope for the reserve currency
country to "manipulate" the system. However, the
underlying reason is more likely the knowledge that if
international liquidity continues to be created through
,dollar accumulation, the scope for SDR creation again
will be reduced or eliminated. (in addition to their
desire for the SDR-aid "link", the LDCs have put forward
ingenious schemes for dollar substitution accounts
which would generate automatic aid flows.)
It may reserve asset~ra e-ofhthe maintenance dollar andrefdtdl of the dominant
proposa s for reducing this role is, and will continue ,..-
i~p , In e interests of .ni_t.ed States. It may
The second main LDC objective in the monetary area
will be to tap the resources of the IMF for the support
of their proposals in the commodity area. Specifically,
their integrated commodity program has as a key element
the establishment of a common fund to finance buffer
stocks of important commodities. The LDCs are pressing
for a relaxation of current IMF rules so as to allow
the IMF to directly finance buffer stocks. (The present
XMF buffer stock facility makes financing available
only to member countries that need balance of payments
assistance to enable them to contribute to international
buffer stocks.) If direct IMF financing were
available, this would be an important source of financing
for the common fund. We will need to consider further
how much we wish to stretch the basic purposes of the
Fund to meet these demands.
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Conclusions: The Jamaica monetary package will
bring a period of retose in monetary issues among the
industrialized countries, allowing the system to evolve
in a pragmatic fashion, and defusing the conflicts
that have troubled our relationships, especially with
the French. And LDCs have received a substantial payoff
in the package which should have a beneficial effect
on north-south relations. But we will still need to
deal with some longer-term monetary issues in the
context of our continuing efforts to improve our
relationships with the developing world.
Drafted by:
EB/IFD/OMA:GPBalabanis
1/15/76; Ext. 20633
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