Title Page
THE INTERNATIONAL MONETARY FUND 1966–1971
The System Under Stress
VOLUME I: Narrative
By
Margaret Garritsen de Vries
INTERNATIONAL MONETARY FUND
WASHINGTON, D. C.
1976
Copyright
© 1986 International Monetary Fund
ISBN 0-939934-09-4 (v.I)
ISBN 0-939934-11-6 (set)
De Vries, Margaret Garritsen, 1922–
The International Monetary Fund, 1966–1971: the system under stress. Washington, D.C., International Monetary Fund, 1976.
2 v.
Sequel to The International Monetary Fund, 1945–1965: twenty years of international monetary cooperation, by J. K. Horsefield and others, published by the Fund in 1969.
CONTENTS: v.I, Narrative, by Margaret Garritsen de Vries.—v.2, Documents, edited by Margaret Garritsen de Vries.
1. International Monetary Fund. 2. International finance. 3. International liquidity. 4. Special drawing rights. 5. Foreign exchange. I. Title.
Foreword
This history of the International Monetary Fund for the years 1966 through 1971 in two volumes is a sequel to three earlier volumes, which recounted the origins of the Fund and covered the first twenty years of its existence, from 1945 to 1965.
The six years now reviewed were momentous ones in international monetary relationships, and therefore for the Fund. In this period, the first amendment of the Articles of Agreement took place when the Fund was entrusted with authority for creation of a new reserve asset, the special drawing right. There was also a substantially increased use of the Fund’s resources, accompanied by a sizable increase in members’ quotas and by important changes in the Fund’s policies governing the use of its financial resources. In addition, the Fund endeavored to serve an enlarged membership better by undertaking a number of new responsibilities and activities, primarily in the fields of technical assistance and training.
Outstanding as were the foregoing developments, however, it was the emergence of severe crises concerning gold and exchange rates from 1967/68 onward that catapulted international monetary events to the forefront of world attention and presented problems and challenges to the world’s economic and financial authorities that were the most difficult since the inception of the Fund.
The Fund’s role in all these events is described in Volume I, Narrative. Volume II reproduces the most important documents published by the Fund from 1966 until the end of 1971 and makes available for the first time seven draft outlines for reserve-creating schemes that were prepared in the Fund as part of the process by which special drawing rights were established.
With the advent of the SDR, the period reviewed may in some respects be seen as a special high point in the Fund’s history. The period was, however, also marked by a series of monetary crises that culminated in the collapse of the Bretton Woods system, as described in the closing chapters of Volume I. Subsequently, there were discussions and actions pertinent to reforming the monetary system which are, indeed, still going on. Many of the problems for which solutions have been sought in the years after 1971 thus originated in the period described here. Hence, in publishing these volumes, the Fund hopes to promote understanding of its present, as well as of its past, work.
This history has been written by Margaret Garritsen de Vries, an economist and the Fund’s Historian, a staff member who has been associated with the Fund since 1946. She has had full access to the Fund’s records and has benefited from comments on the manuscript from her staff colleagues and members of the Executive Board, in both their personal and their official capacities. In these respects, these volumes are, as Pierre-Paul Schweitzer stated in his Foreword to the earlier volumes, “history written from the inside.” At the same time, they are the personal responsibility of the author, and no statement or opinion expressed should be understood as committing the Fund in any way.
December 1976
H. Johannes Witteveen
Managing Director
International Monetary Fund
Contents
Foreword
Preface to Volume 1
Chronology of Principal Events, 1966–71
Introduction
PART ONE The Birth of SDRs
CHAPTER 1: EARLY DISCUSSIONS OF LIQUIDITY (Before 1963)
Studies Before Convertibility
Aftermath of Convertibility
The Fund Adapts Its Policies
Proposals for Expanding World Liquidity
The Fund’s Reactions to Proposals
CHAPTER 2: DEBATE ON LIQUIDITY INTENSIFIED (1963–64)
Official Positions Develop
Framework for the Fund’s Study of Liquidity
The Fund Adjusts Policies on Its Resources
General Subject of Liquidity Examined
Group of Ten Reports
Positions at Tokyo
CHAPTER 3: EXPLORING TECHNIQUES FOR RESERVE CREATION (1964–65)
Deliberate Reserve Creation Studied
Two Possible Techniques for Creating Reserves
Studies Accelerated
Proposals for CRUs
Reactions of Management and Staff to CRU Proposals
Ossola Group Report
France and United States Take Opposing Positions
Managing Director’s Assessment and Action
Agreement by Group of Ten on Contingency Planning
CHAPTER 4: SEARCH FOR A CONTINGENCY PLAN FOR RESERVE CREATION (1965–66)
Economic Circumstances Facilitate Agreement
Intensified Discussions by Group of Ten
Emphasis on a Limited Group Continues
Response of Developing Countries
Background to Managing Director’s Proposals
Managing Director’s Proposals
Universality Accepted by Group of Ten
Reasons for Acceptance of Universal Scheme
Widening the Discussions
CHAPTER 5: PROGRESS TOWARD A PLAN FOR RESERVE CREATION (October 1, 1966–April 15, 1967)
Arrangements for Joint Meetings
Purpose of Reserve Creation Discussed
Form of Deliberately Created Reserves Considered
Question of Compulsory Reconstitution
Question of Use and Transfer of a New Reserve
Financing of Reserve Creation
First Joint Meeting
Question of Decision Making
Second Joint Meeting
Aftermath of First and Second Joint Meetings
Plans Redrafted
Attempts to Gain Momentum
CHAPTER 6: SDRs TAKE SHAPE (April 16–September 30, 1967)
Developments in World Reserves
Third Joint Meeting
Decision to Draft a Tentative Outline
Rules for Use and Transfer
Fourth Joint Meeting
Drafting a Final Outline
Outline Agreed by Group of Ten
Approval of Outline by Board of Governors
Only an Outline
CHAPTER 7: AMENDING THE ARTICLES (1967–68)
The Fund’s Task
Defining Currency Convertible in Fact
Stockholm Meeting of the Group of Ten
Decision Taken and Resolution Adopted
CHAPTER 8: SDRs ENTER INTO FORCE (1968–69)
Amendment of By-Laws and Rules and Regulations
Two Separate Accounts
Allocations and Cancellations of SDRs
Operations and Transactions in SDRs
Designation
Reconstitution
Gold-Value Guarantee
Significance of the New Asset
CHAPTER 9: HOW SDRs EVOLVED: A SYNOPSIS
PART TWO Allocation and First Use of SDRs
CHAPTER 10: DECISION TO ALLOCATE SDRs (1969)
Circumstances Leading to Activation
Staff Preparation
Consultations Process Begins
Proposal Formulated
Approval by Board of Governors
A Word in Retrospect
CHAPTER 11: PREPARING FOR SDR ALLOCATION (1969)
Specifying Currencies Convertible in Fact
First Designation Plan
Acceptance of SDRs for Charges and Repurchases
Exclusion from Monetary Reserve Calculations
CHAPTER 12: TWO YEARS OF EXPERIENCE WITH SDRs (1970–71)
Allocations Made
Disclosing Transactions
Transactions Through the General Account
Experience with Designation Plans
Requirement of Need
Total Use of SDRs
An Accepted Reserve
PART THREE General Resources: New Challenges and Responses
CHAPTER 13: CHANGES IN RULES AND PRACTICES
An 85 Per Cent Majority for Several Decisions
Amendments Governing Use of Resources
Amendments Governing Repurchases
Interpretation of the Articles
CHAPTER 14: COMPENSATORY FINANCING EXTENDED AND LIBERALIZED
The Changes of 1966
Usage Increases
Compensatory Financing Becomes Important
CHAPTER 15: FINANCING BUFFER STOCKS
Prelude
African Members Press for Special Study
Report by Staff
Views of Executive Directors and Governors
Intensified Study
A Decision Reached
The Decision Implemented
Consultations to Include Commodities
CHAPTER 16: QUOTAS ENLARGED
Growth from 1966 to 1969
Fifth General Review Begins
Agreement Reached on Fifth General Review
New Quotas Become Effective
Other Increases in Quotas During 1969–71
Policy on Small Quotas
Quota Formula to Be Reviewed
CHAPTER 17: INCREASES IN DRAWINGS
Total Drawings
Gold Tranche Drawings
Direct Purchases in Credit Tranches
Drawings Under Stand-By Arrangements
Waivers
Currencies Selected: Use of Past Principles
Currencies Selected: Additional Developments
Special Problems After August 15, 1971
CHAPTER 18: CONTINUED EVOLUTION OF STAND-BY ARRANGEMENTS
Stand-By Arrangement for United Kingdom, 1967
Terms of Stand-By Arrangements Reviewed
Stand-By Arrangement for United Kingdom, 1969
Dramatic Improvement in U.K. Economic Situation
United Kingdom Repays the Fund
Stand-By Arrangement for France
Rapid Recovery of French Economy
Stand-By Arrangements for Developing Members
Financial Programming—A Major Activity
Programming Methodology Under Study
Expediting Purchases Under Stand-By Arrangements
CHAPTER 19: OTHER DEVELOPMENTS IN THE FUND’S FINANCES
General Arrangements to Borrow Renewed
Activation of General Arrangements to Borrow
Bilateral Borrowing
Review of Charges
Repurchases
Investment of the Fund’s Assets
The Fund’s Budget
Net Income Is Distributed
Turnabout in Financial Operations
PART FOUR Gold
CHAPTER 20: GOLD: NEW PROBLEMS, NEW POLICIES
Calm Before the Storm: 1965
Gold Pool Abolished
Two-Tier Gold Market
South African Gold: The Problem
Fund Gold Purchases Begin
Fund Sells Gold
General Deposits of Gold
Gold Subsidies and Transactions Service
Basic Questions About Gold Develop
PART FIVE Exchange Rates in Crisis
CHAPTER 21: DEVALUATION OF STERLING (1967)
Prelude to Devaluation
Notification to Fund
The Fund’s Deliberations
Limited Devaluations of Other Currencies
U.K. Economy Fails to Respond
Evaluation of Improvement in U.K. Economy
Sterling Devaluation as Seen at the Time
CHAPTER 22: ADJUSTMENTS IN RATES FOR FRENCH FRANC AND DEUTSCHE MARK (1969)
Prelude to Devaluation of Franc
Meeting at Bonn
Decision to Devalue the Franc
The Fund’s Deliberations on Franc Devaluation
French Franc Area Alters Its Rates
Sequel to Devaluation of Franc
Deutsche Mark Is Revalued
Difficulties After Revaluation of Deutsche Mark
CHAPTER 23: OTHER ADJUSTMENTS IN EXCHANGE RATES (1966–70)
Initial Par Values
Changes in Monetary Units
Devaluation of Indian Rupee
Devaluation by Ghana
Devaluation by Finland
Devaluation by Iceland
Devaluation by Turkey
Devaluation by Ecuador
Canada Returns to a Floating Rate
Canada Continues to Have a Floating Rate
CHAPTER 24: EXAMINING THE EXCHANGE RATE MECHANISM (1969–70)
U.S. Deficit
Tighter U.S. Measures in 1968
Discussions of U.S. Deficit
Countries in Surplus
The Problem of Adjustment
Increasingly Disruptive Capital Flows
Initial Review of Exchange Rate Mechanism
Governors’ Positions
Continued Review by Executive Directors
Agreement by Executive Directors
Reactions of Governors
After Copenhagen
CHAPTER 25: COLLAPSE OF THE PAR VALUE SYSTEM (January 1–August 15, 1971)
Par Value and Other Adjustments
Fresh Disturbances in European Markets
New Measures by European Countries
Difficult Issues Arise
United States Suspends Convertibility
Implications for the Fund
CHAPTER 26: ROAD TO THE SMITHSONIAN AGREEMENT (August 16–December 18, 1971)
Fund’s Immediate Response to U.S. Announcement
Exchange Rate Realignment—A Sensitive Issue
Mr. Schweitzer’s Concerns and Responses
Variety of Exchange Rates Introduced
Group of Ten Meetings
1971 Annual Meeting
After the 1971 Annual Meeting
Group of Ten Meets Again
Developing Countries Present Their Views
Smithsonian Agreement
CHAPTER 27: A TEMPORARY REGIME ESTABLISHED (December 18–31, 1971)
Consideration of Central Rates
Decision Adopted
Rates Communicated
The Fund’s Operations Restored
World Payments Situation at the End of 1971
International Monetary Reform—the Next Step
A Backward Glance
PART SIX The Fund as an Institution
CHAPTER 28: GROWTH OF RESPONSIBILITIES
Increases in Membership
Continued Importance of Annual Consultations
Trends in Exchange Restrictions
Developments in Annual Consultations
Technical Assistance Evolves into a Large Program
Technical Assistance in Central Banking
Technical Assistance in Fiscal Affairs
Technical Assistance in Statistics
General Technical Assistance
Special Program for Zaïre Ended
Growth of IMF Institute
CHAPTER 29: FURTHER EXPANSION OF ACTIVITIES
Payments Arrears Defined as Restrictions
Greater Concern with External Debt Service
External Debt of Ghana
External Debt: A Long-Term Problem
The Fund as a Center for Information
Relations with UN, GATT, and OECD
Relations with Other Organizations
Cooperation with the World Bank
CHAPTER 30: COMPLEXITIES IN THE PROCESS OF POLICYMAKING
Membership: Formation of Groups
Board of Governors: Growth in Size and Powers
Executive Board: Increasing Functions
Executive Board: Changes in Composition
Executive Board: Composition at End of 1971
Executive Board: Size and Structure
Managing Director
Deputy Managing Director
Staff: Organization and Expansion
Staff: Teamwork, Anonymity, and Long Service
New Headquarters Building
The Fund as 1971 Ended
APPENDICES
APPENDIX A-1: Appointed Executive Directors and Their Alternates, Article XII, Section 3(b)(i)
APPENDIX A-2: Elected Executive Directors and Their Alternates, Article XII, Section 3(b)(iii)
APPENDIX A-3: Elected Executive Directors and Their Alternates, Article XII, Section 3(b)(iv)
APPENDIX B: Management and Senior Staff
APPENDIX C: Organizational Chart
TABLES
1. Participants and Observers at First and Second Joint Meetings of Executive Directors of Fund and Deputies of Group of Ten, 1966–67
2. Participants and Observers at Third and Fourth Joint Meetings of Executive Directors of Fund and Deputies of Group of Ten, 1967
3. Allocations of Special Drawing Rights, 1970–72
4. Purchases and Repurchases Under Decision on Compensatory Financing of Export Fluctuations, February 27, 1963–April 30, 1972
5. Quotas of Members on Selected Dates
6. Drawings from the Fund, 1966–71
7. Stand-By Arrangements Approved, January 1, 1966–December 31, 1971
8. Drawings and Repurchases by Currency, Calendar Years, 1966–71
9. Borrowing by Fund Under General Arrangements to Borrow, 1966–71
10. Financing of Drawings by France and United Kingdom Involving Activation of General Arrangements to Borrow, 1966–71
11. Charges on Fund’s Holdings of Member’s Currency in Excess of Member’s Quota Resulting from Transactions Effected from May 1, 1963 to December 31, 1971
12. Total Purchases and Repurchases by Members, Fiscal Years Ended April 30, 1966–71
13. Repurchases of Currencies, Fiscal Years Ended April 30, 1966–71
14. Income and Expenditure of Fund, Fiscal Years Ended April 30, 1966–71
15. Changes in Par Values, November 18–27, 1967
16. Initial Par Values Established, 1966–70
17. Exchange Rate Relationships Resulting from Smithsonian Agreement, December 18, 1971
18. Par Values Maintained Unchanged as of December 31, 1971
19. Par Values Changed, December 18–31, 1971
20. Central Rates Established, December 18–31, 1971
Index
Publications Cited
Illustrations
Pierre-Paul Schweitzer, Chairman of Executive Board and Managing Director
Meeting of 1966–68 Executive Board
Museum of Modern Art, Rio de Janeiro, Site of 1967 Annual Meeting
President Lyndon B. Johnson, Pierre-Paul Schweitzer, Managing Director, and Henry H. Fowler, Governor for United States
Meeting of 1968–70 Executive Board
Meeting of 1970–72 Executive Board
Joint Session of Boards of Governors of Fund and World Bank at an Annual Meeting
Frank A. Southard, Jr., Deputy Managing Director
Headquarters, Washington, 1973
Preface to Volume I
The history of the Fund for the six years 1966 through 1971 differs in many ways from that of the Fund’s first twenty years. Innovative changes were introduced into the original design of the Bretton Woods system. Yet, notwithstanding these changes, such severe stress developed in that system as to cause its eventual collapse. Several of the monetary and financial questions discussed in the Fund in the period reviewed here were new to the international scene and involved highly technical matters with widespread implications for the monetary system. These questions engaged the interest of economists and monetary specialists to an extent that had not occurred since the discussions attending the birth of the Fund in 1944.
Moreover, in the second half of the 1960s, the Fund’s activities and decisions became increasingly interwoven with discussions in and decisions by other forums, most notably the Group of Ten but also the European Economic Community and groups formed by developing countries. Also, to an extent greater than in the preceding twenty years, in the six years reviewed here events taking place in the Fund were directly and quickly influenced by economic and monetary developments taking place in the world as a whole and in individual member countries, especially as one monetary crisis after another erupted. Literally, the events of yesterday bore heavily on today’s discussions and decisions. This situation was quite unlike that of the Bretton Woods discussions, in which the circumstances of war were, in a sense, ignored while the participants planned for a world yet to come into being after World War II. Furthermore, the questions involved in 1966–71 were of such consequence as to concern officials at the very highest political levels; and the circumstances were conducive to the public expression of views on these questions while negotiations had not yet been completed.
These factors have necessarily influenced my writing. I have organized this history around what I see as the four main areas in which the Fund’s further evolution as an international monetary organization took place: the establishment of special drawing rights (SDRs); the unprecedented recourse by members to the financial resources of the Fund and important changes in policies affecting the use of those resources; the emergence of severe disturbances in gold and exchange markets that brought to an end the international monetary system created at Bretton Woods; and, with the growth of membership, the gradual assumption by the Fund of new responsibilities and activities. In my descriptions, I have tried especially to bring out the major issues that were involved insofar as the Fund was concerned and the reasoning that underlay the Fund’s actions and decisions. As in the volumes relating the Fund’s history for earlier years, the primary focus is on the Executive Board and the principal source of information has been the minutes of the Executive Board’s meetings and informal sessions. However, to a considerably greater extent than was done in the earlier volumes, I have included material describing the staff’s analyses, the considerations behind several of the decisions of the Managing Director, the nature of economic and monetary developments influencing negotiations, and related discussions and decisions taking place outside the Fund. This material has all been based on the Fund’s documents and records.
My aim has been to describe the Fund’s actions objectively. Since this is a history of events that are relatively near in time, there are instances, particularly in the final chapters, where I have regarded my task as mainly reportorial, and where I have refrained from analysis or interpretation.
Finally, some material has been included so that this history of the Fund for the years 1966–71 may be fairly self-contained, that is, so that readers do not necessarily have to have read the history of the Fund for earlier years.
A few techniques for identifying officials in a relatively simple way have been adopted. Those appointed by member countries as Governors of the Fund and of the World Bank have been referred to in these capacities, especially when they attended Annual Meetings, rather than in their capacities as officials of their home countries, usually Ministers of Finance or Governors of central banks. The Managing Director, who is also the Chairman of the Executive Board, is referred to as the Managing Director, thus avoiding the need to distinguish in which capacity he may have been acting at the time. The full name of an Executive Director and, as an approximation to the identification of his constituency, his country of nationality are given the first time he is mentioned; his country of nationality is repeated the first time he is mentioned in each of the subsequent parts into which the volume is divided. A similar course has been followed for Alternate Executive Directors, each of whom is also linked, on the first occasion he is mentioned, to the Executive Director who appointed him. Thereafter surnames only are used. The first mention of an Executive Director or of an Alternate Executive Director may come in a series of names and, consequently, there is at times a mixture of given names and surnames, especially in the later parts of the volume. The procedure may, therefore, be confusing for those reading only certain parts, but any alternative seemed to be even more complicated and repetitive of given names.
There is another point concerning the members of the Executive Board to which the reader should be alerted. During the period reviewed here, changes were made in appointed Executive Directors and, following the customary biennial elections of Executive Directors, newly elected Directors took office on November 1 of 1966, 1968, and 1970. For ease of exposition, changes in Executive Directors have not been spelled out in Parts One through Five. A brief description of the changes in the composition of the Executive Board from 1966 through 1971 is given in Part Six (Chapter 30). A complete listing of the Executive Directors and their Alternates and of the countries appointing or electing them and the years in which they served is given in Appendix A–1, Appendix A–2, and Appendix A–3.
The names of some member countries were changed in the period reviewed here. However, the names in effect on December 31, 1971 have been used throughout the volume.
I am very much indebted to numerous colleagues both on the staff and on the Executive Board for their many comments. Unfortunately, I cannot mention all of their names here. I have especially warm feelings for several who have been exceptionally close to this history of the Fund. Frank A. Southard, Jr., Deputy Managing Director from November 1, 1962 until March 1, 1974, made several suggestions and read most of the manuscript; his extensive personal files and notes of meetings at which he presided or in which he took part provided me with much essential information and with background for understanding the formal documents. Joseph Gold, the General Counsel, and J. J. Polak, the Economic Counsellor, have answered queries, provided explanations and interpretations, and read and commented on draft copy, thereby enabling me to make more accurate and more complete than would otherwise have been possible descriptions of many events in which they participated. Fred Hirsch’s comments on an early draft of the chapters on SDRs prompted me to make extensive revisions. J. Keith Horsefield, responsible for the history of the Fund for 1945 to 1965, read this sequel and made many suggestions. Philine Lachman read the manuscript with a lawyer’s eye.
Marie C. Stark, Archivist, and her assistant, Milton K. Chamberlain, sorted out the materials that I needed from among the Fund’s voluminous records and documents; their intimate familiarity with these records and documents made my hours of research most fruitful. Martin L. Loftus and Charles O. Olsen, then Librarian and Assistant Librarian, respectively, of the Joint Bank-Fund Library, and their staff helped me to keep abreast of related current literature.
Helen G. (Becky) Burrows was my assistant throughout most of the project, typing drafts, preparing statistical tables and Appendices, and making editorial suggestions; in all these capacities she was invaluable. Faye L. Olin performed secretarial and editorial duties in the later stages of the project.
Jane B. Evensen, Editor, assisted by Jennie Lee Carter, painstakingly edited the final manuscript and saw the volumes through to publication. Surinder Nath worked on the index. The Graphics Section helped in several ways with the production process; Joseph J. Diana assisted with photographs, and Toshiko Habir designed the dust jacket.
Needless to say, any shortcomings, errors, or blemishes that remain are my responsibility.
December 1976
M. G. de V.
Chronology of Principal Events, 1966–711
1966 | |
February 23 | A general increase in Fund quotas of 25 per cent, together with special increases for 16 countries, became effective, which would, when all members had consented to their increases, expand the Fund’s resources from $16 billion to $21 billion. |
June 3 | The Executive Board concurred in a proposal by India to change the par value of the rupee from 21 U.S. cents per rupee to 13.3333 U.S. cents per rupee, to be effective on June 5 (Washington time). |
September 20 | The Executive Board took a decision extending and liberalizing the compensatory financing facility. |
1967 | |
July 7 | The Executive Board concurred in a proposal by Ghana to change the par value of the new cedi from 140 U.S. cents per new cedi to 98 U.S. cents per new cedi, to be effective on July 8. |
September 29 | The Board of Governors approved the “Outline of a Facility Based on Special Drawing Rights in the Fund,” and asked that the Executive Directors proceed with work on drafting amendments to the Articles of Agreement. |
September 29 | The Board of Governors adopted a resolution asking for a study by the Fund and the World Bank of the problem of stabilization of the prices of primary products. |
October 11 | The Executive Board concurred in a proposal by Finland to change the par value of the markka from 31.25 U.S. cents per markka to 23.8097 U.S. cents per markka, to be effective on October 12. |
November 18 | The Executive Board concurred in a proposal by the United Kingdom to change the par value of the pound sterling from $2.80 to $2.40 per pound sterling, effective that same date. |
November 18–27 | The Executive Board concurred in proposals by Ireland, Israel, Cyprus, Guyana, Malawi, New Zealand, Spain, Ceylon, Denmark, Jamaica, Sierra Leone, Trinidad and Tobago, and Iceland to change their par values, and in a proposal by The Gambia to change its exchange rate. |
November 29 | The Executive Board approved a stand-by arrangement for the United Kingdom for $1.4 billion. |
1968 | |
March 16–17 | The central banks of seven countries agreed to buy and sell gold at the official price of $35 an ounce only in transactions with monetary authorities, and a two-tier market for gold emerged. |
April 16 | The Executive Board completed its work on the proposed amendments to the Articles of Agreement establishing an SDR facility in the Fund and making certain changes in the Fund’s rules and practices; the amendments were to be transmitted to the Board of Governors for consideration and approval. |
May 31 | The Board of Governors approved the proposed amendments to the Articles of Agreement, which were then submitted to members for acceptance. |
June 4 | The French franc had come under pressure and France made a gold tranche purchase of $745 million from the Fund. |
June 19 | The United Kingdom drew the $1.4 billion authorized under its stand-by arrangement. |
September 20 | The Executive Board, having reviewed the Fund’s policy on the use of its resources under stand-by arrangements, adopted guidelines to ensure uniform and equitable treatment for all members. |
November 11 | The Executive Board concurred in a proposal by Iceland to change the par value of the króna from 1.75439 U.S. cents per króna to 1.13636 U.S. cents per króna, to be effective on November 12. |
November 20–22 | After a new exchange crisis had forced the closing of markets in France, the Federal Republic of Germany, the United Kingdom, and other countries, the Group of Ten met at the ministerial level in Bonn to discuss the measures to be taken, including, inter alia, possible adjustments in the exchange rates of the deutsche mark and the French franc. (No exchange rate action was agreed upon.) |
December 31 | Drawings from the Fund for the year totaled $3.5 billion, the largest annual amount since the Fund commenced operations in 1947. |
1969 | |
June 20 | The Executive Board approved another stand-by arrangement for the United Kingdom, for $1.0 billion. |
June 25 | The Executive Board approved a facility to finance international buffer stocks of primary products. |
July 28 | The amendments to the Articles of Agreement entered into force. |
August 6 | The Special Drawing Account came into existence. |
August 10 | The Executive Board concurred in a proposal by France to change the par value of the franc from 0.180 gram of gold per franc to 0.160 gram of gold per franc, effective the same day. |
September 19 | The Executive Board approved a stand-by arrangement for France for $985 million, and shortly thereafter France purchased $500 million under the arrangement. |
September 29 | The Federal Republic of Germany informed the Fund that it could not maintain rates for the deutsche mark within prescribed limits around the par value, and thus the rate for the deutsche mark was allowed to float. |
October 3 | The Board of Governors approved the Managing Director’s proposal to allocate SDRs over a first basic period of three years beginning January 1, 1970. |
October 17 | The Executive Board agreed to a second renewal of the General Arrangements to Borrow for five years beginning October 24, 1970. |
October 24 | The Executive Board concurred in a proposal by the Federal Republic of Germany to change the par value of the deutsche mark from 25 U.S. cents per deutsche mark to 27.3224 U.S. cents per deutsche mark, to be effective on October 26. This revaluation ended the floating rate for the deutsche mark. |
November 7 | The Executive Directors continued with the review of the role of exchange rates in the adjustment of international payments that they had begun somewhat earlier in connection with their Annual Report for 1969. |
December 1–30 | The Executive Board took a series of decisions preparatory to putting the Special Drawing Account into operation. |
December 30 | The Executive Board took a decision whereby as a matter of policy the Fund would buy gold from South Africa. |
December 31 | Drawings from the Fund for the year totaled $2.5 billion, the largest so far for any year except 1968. |
1970 | |
January 1 | The first allocation of SDRs was made. |
February 2 | France drew the remaining $485 million authorized under its stand-by arrangement. |
February 9 | The Board of Governors approved increases in quotas under the fifth general review. Fund quotas would be increased from $21.3 billion to $28.9 billion if all members increased their quotas to the maximum proposed. |
May 31 | Canada informed the Fund that it would not maintain the exchange rate of the Canadian dollar within its present margins, and the rate for the Canadian dollar once again was allowed to float. |
August 9 | The Executive Board concurred in a proposal by Turkey to change the par value of the lira from 11.1111 U.S. cents per lira to 6.66667 U.S. cents per lira. |
August 14 | The Executive Board concurred in a proposal by Ecuador to change the par value of the sucre from 5.55556 U.S. cents per sucre to 4.00000 U.S. cents per sucre, to be effective on August 17. |
September 13 | The Executive Board reported to the Board of Governors on the role of exchange rates in the adjustment of international payments. |
September 25 | Closing the Twenty-Fifth Annual Meeting of the Board of Governors, Mr. Hédi Nouira, Chairman, observed that, on the subject of exchange rate flexibility, “there seems to be a consensus in favor of further study by the Fund but against any radical or major changes.” |
October 26 | The Executive Board decided that restrictions resulting in payments arrears were exchange restrictions subject to the Fund’s approval. |
November 25 | The Executive Board took a decision that enabled members to use the buffer stock financing facility in connection with their contributions under the Fourth International Tin Agreement. |
1971 | |
January 1 | The second allocation of SDRs was made. |
January 23 | The Executive Board concurred in a proposal by Yugoslavia to change the par value of the dinar from 8.0000 U.S. cents per dinar to 6.66667 U.S. cents per dinar. |
May 9–11 | To stem capital inflows, the Federal Republic of Germany and the Netherlands allowed the rates for their currencies to float, the Belgo-Luxembourg Exchange Institute enlarged its free market for capital transactions, and Austria revalued its currency. |
July 16 | The first purchases under the buffer stock financing facility were made, by Bolivia and Indonesia. (Malaysia purchased under the facility on August 10.) |
August 15 | The United States informed the Fund that it would no longer freely buy and sell gold for the settlement of international transactions, thus suspending the convertibility of officially held dollars. |
August 16–28 | Members introduced a variety of exchange rate arrangements, with rates for several major currencies allowed to float. |
October 1 | The Board of Governors adopted a resolution calling for study of measures to improve or reform the international monetary system. |
December 17–18 | The Group of Ten decided, as part of the Smithsonian agreement, on a realignment of the currencies of the major industrial countries. |
December 18 | The Executive Board took a decision establishing a temporary regime of central rates and wider margins. |
1966 | |
February 23 | A general increase in Fund quotas of 25 per cent, together with special increases for 16 countries, became effective, which would, when all members had consented to their increases, expand the Fund’s resources from $16 billion to $21 billion. |
June 3 | The Executive Board concurred in a proposal by India to change the par value of the rupee from 21 U.S. cents per rupee to 13.3333 U.S. cents per rupee, to be effective on June 5 (Washington time). |
September 20 | The Executive Board took a decision extending and liberalizing the compensatory financing facility. |
1967 | |
July 7 | The Executive Board concurred in a proposal by Ghana to change the par value of the new cedi from 140 U.S. cents per new cedi to 98 U.S. cents per new cedi, to be effective on July 8. |
September 29 | The Board of Governors approved the “Outline of a Facility Based on Special Drawing Rights in the Fund,” and asked that the Executive Directors proceed with work on drafting amendments to the Articles of Agreement. |
September 29 | The Board of Governors adopted a resolution asking for a study by the Fund and the World Bank of the problem of stabilization of the prices of primary products. |
October 11 | The Executive Board concurred in a proposal by Finland to change the par value of the markka from 31.25 U.S. cents per markka to 23.8097 U.S. cents per markka, to be effective on October 12. |
November 18 | The Executive Board concurred in a proposal by the United Kingdom to change the par value of the pound sterling from $2.80 to $2.40 per pound sterling, effective that same date. |
November 18–27 | The Executive Board concurred in proposals by Ireland, Israel, Cyprus, Guyana, Malawi, New Zealand, Spain, Ceylon, Denmark, Jamaica, Sierra Leone, Trinidad and Tobago, and Iceland to change their par values, and in a proposal by The Gambia to change its exchange rate. |
November 29 | The Executive Board approved a stand-by arrangement for the United Kingdom for $1.4 billion. |
1968 | |
March 16–17 | The central banks of seven countries agreed to buy and sell gold at the official price of $35 an ounce only in transactions with monetary authorities, and a two-tier market for gold emerged. |
April 16 | The Executive Board completed its work on the proposed amendments to the Articles of Agreement establishing an SDR facility in the Fund and making certain changes in the Fund’s rules and practices; the amendments were to be transmitted to the Board of Governors for consideration and approval. |
May 31 | The Board of Governors approved the proposed amendments to the Articles of Agreement, which were then submitted to members for acceptance. |
June 4 | The French franc had come under pressure and France made a gold tranche purchase of $745 million from the Fund. |
June 19 | The United Kingdom drew the $1.4 billion authorized under its stand-by arrangement. |
September 20 | The Executive Board, having reviewed the Fund’s policy on the use of its resources under stand-by arrangements, adopted guidelines to ensure uniform and equitable treatment for all members. |
November 11 | The Executive Board concurred in a proposal by Iceland to change the par value of the króna from 1.75439 U.S. cents per króna to 1.13636 U.S. cents per króna, to be effective on November 12. |
November 20–22 | After a new exchange crisis had forced the closing of markets in France, the Federal Republic of Germany, the United Kingdom, and other countries, the Group of Ten met at the ministerial level in Bonn to discuss the measures to be taken, including, inter alia, possible adjustments in the exchange rates of the deutsche mark and the French franc. (No exchange rate action was agreed upon.) |
December 31 | Drawings from the Fund for the year totaled $3.5 billion, the largest annual amount since the Fund commenced operations in 1947. |
1969 | |
June 20 | The Executive Board approved another stand-by arrangement for the United Kingdom, for $1.0 billion. |
June 25 | The Executive Board approved a facility to finance international buffer stocks of primary products. |
July 28 | The amendments to the Articles of Agreement entered into force. |
August 6 | The Special Drawing Account came into existence. |
August 10 | The Executive Board concurred in a proposal by France to change the par value of the franc from 0.180 gram of gold per franc to 0.160 gram of gold per franc, effective the same day. |
September 19 | The Executive Board approved a stand-by arrangement for France for $985 million, and shortly thereafter France purchased $500 million under the arrangement. |
September 29 | The Federal Republic of Germany informed the Fund that it could not maintain rates for the deutsche mark within prescribed limits around the par value, and thus the rate for the deutsche mark was allowed to float. |
October 3 | The Board of Governors approved the Managing Director’s proposal to allocate SDRs over a first basic period of three years beginning January 1, 1970. |
October 17 | The Executive Board agreed to a second renewal of the General Arrangements to Borrow for five years beginning October 24, 1970. |
October 24 | The Executive Board concurred in a proposal by the Federal Republic of Germany to change the par value of the deutsche mark from 25 U.S. cents per deutsche mark to 27.3224 U.S. cents per deutsche mark, to be effective on October 26. This revaluation ended the floating rate for the deutsche mark. |
November 7 | The Executive Directors continued with the review of the role of exchange rates in the adjustment of international payments that they had begun somewhat earlier in connection with their Annual Report for 1969. |
December 1–30 | The Executive Board took a series of decisions preparatory to putting the Special Drawing Account into operation. |
December 30 | The Executive Board took a decision whereby as a matter of policy the Fund would buy gold from South Africa. |
December 31 | Drawings from the Fund for the year totaled $2.5 billion, the largest so far for any year except 1968. |
1970 | |
January 1 | The first allocation of SDRs was made. |
February 2 | France drew the remaining $485 million authorized under its stand-by arrangement. |
February 9 | The Board of Governors approved increases in quotas under the fifth general review. Fund quotas would be increased from $21.3 billion to $28.9 billion if all members increased their quotas to the maximum proposed. |
May 31 | Canada informed the Fund that it would not maintain the exchange rate of the Canadian dollar within its present margins, and the rate for the Canadian dollar once again was allowed to float. |
August 9 | The Executive Board concurred in a proposal by Turkey to change the par value of the lira from 11.1111 U.S. cents per lira to 6.66667 U.S. cents per lira. |
August 14 | The Executive Board concurred in a proposal by Ecuador to change the par value of the sucre from 5.55556 U.S. cents per sucre to 4.00000 U.S. cents per sucre, to be effective on August 17. |
September 13 | The Executive Board reported to the Board of Governors on the role of exchange rates in the adjustment of international payments. |
September 25 | Closing the Twenty-Fifth Annual Meeting of the Board of Governors, Mr. Hédi Nouira, Chairman, observed that, on the subject of exchange rate flexibility, “there seems to be a consensus in favor of further study by the Fund but against any radical or major changes.” |
October 26 | The Executive Board decided that restrictions resulting in payments arrears were exchange restrictions subject to the Fund’s approval. |
November 25 | The Executive Board took a decision that enabled members to use the buffer stock financing facility in connection with their contributions under the Fourth International Tin Agreement. |
1971 | |
January 1 | The second allocation of SDRs was made. |
January 23 | The Executive Board concurred in a proposal by Yugoslavia to change the par value of the dinar from 8.0000 U.S. cents per dinar to 6.66667 U.S. cents per dinar. |
May 9–11 | To stem capital inflows, the Federal Republic of Germany and the Netherlands allowed the rates for their currencies to float, the Belgo-Luxembourg Exchange Institute enlarged its free market for capital transactions, and Austria revalued its currency. |
July 16 | The first purchases under the buffer stock financing facility were made, by Bolivia and Indonesia. (Malaysia purchased under the facility on August 10.) |
August 15 | The United States informed the Fund that it would no longer freely buy and sell gold for the settlement of international transactions, thus suspending the convertibility of officially held dollars. |
August 16–28 | Members introduced a variety of exchange rate arrangements, with rates for several major currencies allowed to float. |
October 1 | The Board of Governors adopted a resolution calling for study of measures to improve or reform the international monetary system. |
December 17–18 | The Group of Ten decided, as part of the Smithsonian agreement, on a realignment of the currencies of the major industrial countries. |
December 18 | The Executive Board took a decision establishing a temporary regime of central rates and wider margins. |
Includes all changes in par values before August 15, 1971.
Frontmatter Page
THE INTERNATIONAL MONETARY FUND
1966–1971
Volume I: Narrative
Frontmatter Page
“If we consider the international monetary system not only as a structure, hut also, as I believe we must, as the way in which that structure is used, it is quite evident that we do not have the same system now as we had five, let alone ten, years ago.”
—Pierre-Paul Schweitzer, Managing Director, addressing the International Financial Conference in Geneva on May 19, 1970.
Introduction
The Six Years from January 1, 1966 to December 31, 1971 were extremely important ones in the history of the International Monetary Fund. They were filled with turbulence and fundamental change in the international monetary system, all of which directly affected the functions and activities of the Fund. At the beginning of this period—in January 1966—it was already apparent that the world economic environment was changing radically. Among other things, short-term flows of capital were becoming larger and more difficult to manage by the methods that had been devised in the early 1960s. Moreover, concern that the supply of liquidity in the monetary system might prove insufficient had intensified, and monetary officials were in the midst of a debate on the need to introduce some innovative mechanism for deliberately creating reserves to augment that liquidity. Eventually, in 1969, special drawing rights (SDRs) were established in the Fund. The advent of SDRs was certainly the zenith of the Fund’s first twenty-five years. And later, when full-scale reform of the international monetary system was being negotiated, many monetary experts were to look upon their establishment as the first part of a general monetary reform.
The years 1966 through 1971 featured, however, not only the creation of SDRs but also the onset of the disturbances that caused the breakdown of the Bretton Woods system and the need for discussions on monetary reform.
Even before the first SDRs could be allocated, the international monetary system was being subjected to stresses and strains more severe than any experienced since World War II. The imbalance in international payments and the flows of short-term capital from one money center to another that had emerged in the late 1950s and the early 1960s became steadily greater, and the resulting problems became increasingly harder to solve, or even to alleviate. Consequently, exchange crises became a regular feature of the international scene, especially after November 1967. News that traditionally had been relegated to the financial pages made front-page headlines when, in the next three and a half years, sterling was devalued, a single official price for gold was abandoned and a two-tier gold market set up, the French franc was devalued, the deutsche mark was revalued, and floating exchange rates for the Canadian dollar, the deutsche mark, and the Netherlands guilder were introduced. Then, on August 15, 1971, came the suspension by the United States of convertibility into gold of officially held dollars. As a result, two basic tenets of the Fund’s Articles of Agreement—the system of agreed par values and the convertibility of dollars into gold—were no longer operative. The system designed at Bretton Woods a quarter of a century before had collapsed. The Ministers and Central Bank Governors of the Group of Ten, meeting at the Smithsonian Institution in Washington in December 1971, reached agreement on the realignment of the currencies of their countries, and subsequently the Fund’s Executive Board adopted a decision on a temporary regime of central rates and wider exchange rate margins. The crisis was so profound, however, that virtually everyone recognized the urgent need for a thoroughgoing reform of the international monetary system.
Thus this period in the Fund’s history, one of trying to hold together the Bretton Woods system through severe stresses and strains, was distinctly different from either the preceding twenty years or the years following 1971. In the two decades 1945–65 there had been tremendous progress toward the attainment of the goals for which the Fund had been established. Reconstruction of the economies devastated by World War II had been accomplished, and the world had benefited from a signal expansion of international trade and investment. Most members of the Fund had achieved agreed par values or, at least, fixed exchange rates. Currency convertibility had been restored. Restrictions on current international payments were far fewer than they had been for decades, and even controls on capital, permitted by the Fund’s Articles of Agreement, had been reduced much more than had been thought likely. The International Monetary Fund had become a successful instrument for international cooperation and consultation in the monetary and financial fields.1 The years immediately after 1971 formed another epoch, one characterized primarily by a very ambitious attempt to achieve a multifaceted reconstruction of the international monetary system.
Scope and Coverage of this Narrative
At the outset of the period 1966–71 the world’s monetary officials were deliberating the problem of international liquidity. They had been discussing this problem for several years, but they were by no means agreed that the supply of liquidity in the international monetary system was actually inadequate or that unusual new arrangements for creating liquidity were necessary. Consensus on any particular mechanism for deliberate creation of reserves was even more remote. It was agreed only that it was important to formulate a plan for creating reserves should the need arise in the future. In the next few years continuous discussion took place, inside and outside the Fund, both about issues and about particular proposals, until August 1969 when the facility for special drawing rights (SDRs) became a part of the structure of the Fund.
The establishment of SDRs was, without doubt, the most striking achievement of the Fund in the years 1966–71. Hence, after a description (in Chapters 1, 2, and 3 and a part of Chapter 4) of what transpired with regard to international liquidity before 1966, the rest of Part One and all of Part Two of this volume are devoted to tracing the evolution of SDRs and the first two years of experience with them.
The earlier history of the Fund discussed at some length the subject of the adequacy of the world’s reserves and the two relevant Fund reports issued during the 1950s, but described only briefly the stirring of concern about international liquidity and the Fund’s attention to it, through 1965, as reflected in the Annual Reports of the Executive Directors and the Annual Meetings of the Board of Governors. In this volume, therefore, only a few paragraphs are devoted to the events of the 1950s, but developments from 1960 through 1965 are treated more fully. Chapter 1 describes what happened in the field of international liquidity before 1963. Following the pattern of Volume I, Chronicle, of the earlier history, Chapters 2–8 of the present volume, which deal with the birth of SDRs, trace the events in 12-month intervals from one Annual Meeting to the next; the Annual Meetings usually brought to a head the debates and negotiations of the preceding year, and in nearly every year the Board of Governors took actions that helped to resolve the impasses that had been blocking further progress. The chapters on other topics are not so arranged, but cover time periods suitable to the topic.
Part Three examines the developments in 1966–71 that pertain to the use of the Fund’s regular resources, which were placed in a General Account after the introduction of SDRs. The economic and financial circumstances of the late 1960s and early 1970s presented several challenges to the Fund with respect to the use of its general resources, and the Fund responded in a number of ways. Changes were made in the original provisions of the Articles of Agreement governing use of resources and repurchases (Chapter 13). The compensatory financing facility, set up in February 1963 to give assistance to primary producing members experiencing temporary shortfalls in their export earnings, was extended and liberalized, and for the first time many countries began to make drawings for this purpose (Chapter 14). Developing countries also sought assistance from the Fund and the World Bank on the problem of stabilizing primary product prices, and after considerable study the Fund introduced a facility for financing buffer stocks (Chapter 15). To meet the unprecedented recourse to the Fund’s resources by both industrial and developing countries, members’ quotas in the Fund were enlarged, particularly by a third round of general quota increases (Chapter 16). Drawings from the Fund were significantly higher than in any other period since the Fund commenced operations in 1947 (Chapter 17).
Most drawings took place under stand-by arrangements. Because of the expanded use of this instrument, the Executive Board reviewed the Fund’s policy on the use of its resources under stand-by arrangements and adopted guidelines to ensure uniform and equitable treatment for all members. Financial programming associated with stand-by arrangements became one of the Fund’s major activities. These developments, together with some description of the stand-by arrangements agreed with two industrial and three developing members and the related economic circumstances, form the subject of Chapter 18. Augmented drawings, as well as other factors, had important ramifications for the Fund’s other financial operations and transactions, such as the charges on drawings, the policies on repurchases, its own budget, the size of its net income, the distribution of some of that income, and the investment of its assets. These developments in the Fund’s other finances are taken up in Chapter 19.
In a period filled with dramatic events, some of the most interesting pertained to gold: there was the breakup of the single market for gold transactions, the introduction of a two-tier market for gold, and new developments in the Fund’s policies toward purchases and sales of gold, including gold from South Africa. These events are discussed in Part Four (Chapter 20).
Consequential as were the foregoing developments, it was the disturbances in exchange markets that presented the most difficulty for the world’s financial authorities. Hence, another major portion of the volume, Part Five, deals with exchange rates. During the years covered here there were a number of important changes in exchange rates. Among the major currencies, there were, first, the devaluation of sterling in November 1967 (described in Chapter 21), and then the devaluation of the French franc in August 1969 and the revaluation of the deutsche mark in October 1969 (described in Chapter 22). There were also devaluations of the Indian rupee (1966), the Ghanaian cedi and the Finnish markka (1967), the Icelandic króna (1968), and the Turkish lira and the Ecuadoran sucre (1970). Also in 1970 Canada reintroduced a fluctuating rate. These developments, together with a description of the initial par values established and the new monetary units introduced from 1966 to 1970, are covered in Chapter 23.
Recurrent crises in exchange markets led to calls for reform of the international monetary system, particularly to proposals for changing the par value system. Hence, international monetary officials had to direct their attention to the broad question: should the mechanism by which exchange rates were adjusted be altered, and if so, how? Chapter 24 describes the review of the mechanism of exchange rate adjustment that the Executive Directors undertook in 1969 and 1970. In 1971 there occurred events in the field of exchange rates that were even more reverberating than those that had taken place earlier, and the system of par values was suspended for what was considered to be a temporary period. These events are set forth in Chapters 25, 26, and 27. Chapter 25 deals with the events from January 1 through August 15, 1971 that culminated in the suspension by the United States of the convertibility of officially held dollars into gold. Chapter 26 describes at some length the difficult negotiations preceding the Smithsonian agreement of December 1971, and Chapter 27 explains the temporary regime of central rates and wider margins that the Fund thereupon established.
Finally, Part Six (Chapters 28–30) presents an overview of how the Fund grew and changed as an institution during the six years ended with 1971. The Fund had to assume new responsibilities and functions as the world of international monetary and financial affairs expanded and became more complex. Consultations with members were expanded, technical assistance to members became much more extensive, new responsibilities were assumed with regard to external debt negotiations of members, and the Fund became a center for the collection and dissemination of information on economic and financial problems.
The story of the Fund’s genesis and of its activities to the end of 1965 has been related at length in The International Monetary Fund, 1945–1965; Twenty Years of International Monetary Cooperation: Vol. I, Chronicle, by J. Keith Horsefield; Vol. II, Analysis, by Margaret G. de Vries and J. Keith Horsefield with the collaboration of Joseph Gold, Mary H. Gumbart, Gertrud Lovasy, and Emil G. Spitzer and edited by J. Keith Horsefield; Vol. III, Documents, edited by J. Keith Horsefield (Washington, 1969). Hereinafter cited as History, 1945–65.