The two Departments in the Fund use radically different techniques to perform financial functions for members that are in many respects similar: both Departments enable a member in deficit to use financial resources that it had not earned from a previous balance of payments surplus. Use of the resources in both Departments also has a very similar effect on the member that provides the users with foreign exchange: this member acquires, in both cases, reserves in the form of “Fund-related assets,” viz., a “reserve position in the Fund” (a reserve tranche position or a readily repayable loan claim on the Fund) when the transaction takes place in the General Department, and SDRs when it takes place in the Special Drawing Rights Department.
In spite of these similarities, transactions in the two Departments are executed in entirely different ways. In the General Department, transactions take the form of drawings on a pool of currencies contributed by all members, with potential additions to that pool from borrowing and from the sale of gold. Members’ entitlements to Fund credit are related to the size of their quotas, but a member cannot regard these entitlements as reserves.7 Reserves are acquired by drawings, and these drawings are normally made in the currencies of the countries that are selected by the Fund to acquire reserve positions in the Fund. Except when the U.S. dollar is drawn, the currencies sold by the Fund are usually at once presented for conversion by the drawer, so that the drawee country experiences a reduction in its holdings of foreign exchange equal to the increase in its reserve position in the Fund. In the Special Drawing Rights Department, by contrast, the allocation of SDRs, in equal percentages of quotas, by itself gives participants additional reserves, which are then usable as such.
Why this difference between the two Departments in their technical and financial arrangements, if it does not reflect any obvious difference in substance between transactions conducted through them? The explanation cannot lie in the difference in purpose between the two Departments. The fact that use of the General Department is conditional beyond the reserve tranche and subject to rules on repurchase to ensure its temporary character, while the use of SDRs is unconditional and subject only to the rules of reconstitution, could hardly justify reliance on a different technique. It would appear that, in essence, the explanation is historical in nature. The Special Drawing Rights Department is both the newer and the simpler of the two Departments. The more complicated form in the older General Department has clear historical reasons: the U.S. negotiators in the discussions preceding Bretton Woods argued strongly that a Fund operating on the basis of “a mixed bag” of currencies was more likely to win Congressional approval than one which—as proposed in the Keynes plan—introduced the unfamiliar concepts of a new international currency and of overdrafts.8
By now, however, these arguments do not have the weight they had 35 years ago.
(1) The concept of an international currency is no longer unfamiliar. On the contrary, the SDR, created by the First Amendment as a “supplement to existing reserve assets,” was promoted to the role of the prospective principal reserve asset in the international monetary system by the Second Amendment.9
(2) The attempt to view transactions through which the Fund made resources available to members in payments difficulties as a mere exchange of one currency for another never took hold. Fund transactions (beyond the reserve tranche) are now generally regarded as the extension of balance of payments credit. This view is reflected, for example, in the adoption of the concept of “credit tranches” and in the widespread use of the term “repayment” as both more general and more meaningful than “repurchase.”
(3) By the early 1960s, the approach originally chosen—i.e., that the Fund would not be a “bank,” creating international money by extending “credit”—had been overcome by the economics of the situation. Up to 1958, the Fund used almost exclusively U.S. dollars in its transactions. The United States did not lose reserves as a result of such use, and in any event U.S. reserves at that time were very large. But when the currencies of other countries began to be drawn, these countries could expect to lose reserve currencies as their own currencies were presented to them for conversion. Since these countries were, in general, reluctant to have their currencies drawn from the Fund if this resulted in a reserve loss, it became necessary to establish the reserve character of the positions in the Fund that members acquired through these drawings.10 This implied that credit extension by the Fund produced reserve creation as a by-product: while dollars shifted from the country drawn upon to the drawing country, additional reserves would come into being in the form of an enlarged reserve position in the Fund. Accordingly, reserve statistics since about 1963 reflect the view (entirely comparable with the concepts underlying domestic banking statistics) that the extension of international credit by the Fund involves an expansion of reserves, and the repayment of such credit a contraction of reserves.11
Given these changes in attitude toward the operations of the General Department and the example of the SDR facility, the question arises whether there is a continuing justification for the present form of the General Department. Perhaps the best way to approach this question is to assume an inversion in the chronological order in which the two functions of the Fund were conceived. Suppose that the founders of the Fund had felt it necessary to concentrate their attention on the need for unconditional rather than conditional liquidity and for this purpose had created a. mechanism such as that contained in Articles XV to XXV of the present Articles of Agreement, perhaps combined with regulatory provisions with respect to exchange rates, the avoidance of exchange restrictions, convertibility, etc. Such a Fund would have required quotas both as a basis for the allocation of unconditional liquidity and to determine voting power, but not contributions in gold or in the currencies of all members. Assume further that, despite the absence of a learning model which the pre-1969 Fund provided for the SDR mechanism, the provisions on SDRs were exactly those of Articles XV to XXV. If then, at some later time, when the SDR facility had been running smoothly for a considerable period, the Fund had reached the conclusion that it would be opportune to provide, side by side with the SDR facility, another facility under which members could obtain conditional credit for temporary use, how would it have gone about this?