Bernstein Foresees Thaw In International Gold War

Edward Bernstein, one of President Johnson's chief advisors on monetary reform, predicted Wednesday that "within 18 months" the leading western industrial countries will agree on a plan to reorganize the world's monetary system.

A "general understanding" will be reached, he said, because the French are "becoming increasingly conciliatory" to U.S. proposals for expanding international currency reserves. These reserves -- composed primarly of dollars, pounds and gold -- are used by central banks such as the Federal Reserve System to prevent temporary payments deficits from choking off world trade.

Bernstein predicted that France will modify her insistence that any new system of creating reserves must be rigidly linked to gold.

French Official Named

This estimate of French attitudes was based, he said, on information provided by "a French inspector general" in several letters and a recent visit. The official's correspondence, he told the Public Affairs Forum at the Business School "seemed to clear up a lot of difficulties."

Bernstein declined in an interview to give the name of the official he had spoken to (there are over 200 Inspecteurs des Finance in France). But highly reliable sources said that it was Guillaume Guindey, head of the Calsse de Corporation de Economique.

Although Guindey's official title does not connect him with questions of monetary reform, he is known to be one of General de Gaulle's most important advisors and negotiators. His activity, one former International Monetary Fund official said Wednesday, is "of enormous influence, but all behind the scenes."

Disagreement on Reserves

The Guindey-Bernstein correspondence combined with Bernstein's prediction, indicates that negotiations within the Group of Ten are entering a significant new phase.

Until recently, France has insisted that the most important problem with the present system is an inflationary excess of reserves, particularly in foreign holdings of dollars. They have demanded that the U.S. and Britain must achieve "a lasting balance" in their payments as a pre-requisite for reform.

U.S. policy makers, however, fear a perilous shortage of these reserves may be developing, since the growth of liquidity -- the supply of currency reserves -- in the post-war period has not kept pace with expanding world trade. The main source of such growth -- dollars flowing from U.S. deficits -- will soon be eliminated.

Monetary Reformes are considered necssary to keep the temporary payments deficits of any country from interfering with its ability to import. When Italy, or example, runs a deficit, foreigners equire more lire than they need. As they sell off surplus lire on world money markets, the price is pushed down.

Under IMF rules, Italy must buy up lire to support the price of its currency. To do his, it must dip into its reserves, using gold or another currency -- usually dollars -- to pay for the lire it buys.

If nations did not stabilize the value of their currencies in this way, uncertainty about future values would make businessmen much less willing to engage in world trade. Without sufficient reserves to support the price of its currency, a nation with a payments deficit would be forced to impose restraints on purchases abroad.

The basic goal of monetary reform. Therefore, is to find something that other countries will agree to hold in their official reserves as confidently as they now hold gold, U.S. dollars and British pounds.

The United States has refrained from endorsing any specific plan, but officials are known to favor deliberate creation through the 103-nation International Monetary Fund, of a new unit of exchange -- a kind of demand deposit with a world central bank -- which IMF officials could distribute to meet the needs of world trade.

The French, however, have insisted that any system of reserve creation be linked rigidly with gold. Any other system, they have argued, would perpetuate the deficiencies of the present system -- forcing countries like France to finance policies which they oppose by compelling them to hold dollars from U.S. deficits.

The first hint of a more conciliatory French view came at the annual meeting of the IMF in October, when France's finance minister Valery Giscard d'Estaing said that it was at least "conceivable" that a distribution of additional reserve assets could take into account "other criteria" besides gold holdings.

The communique issued by the ten provided for three stages in negotiating "arrangements for the future creation" of reserves.

In the first stage, deputy finance ministers of the Group of Ten countries would determine a "basis for agreement on essential points".

As soon as a consensus is reached the governments will move into a second stage of "broader consideration of the questions that affect the world economy as a whole." In this stage, the group said the deputies would work with the IMF 20-member executive board, giving a voice to the less-developed countries.

The final enactment of any new arrangements, the third stage, would occur at "an appropriate forum for international discussions" Once a consensus is reached in the first stage, the remaining two stages are expected to be mere formalities to satisfy the underdeveloped countries.

Bernstein's remarks on Wednesday indicated that the Group of Ten is rapidly moving toward a consensus in this first and crucial stage. France is expected to insist in general terms that any new system for reserve creation impose greater discipline on deficit countries like the U.S. and Britain.

But on specific proposals an observor noted "the ice is breaking"