Excerpts from the Stamp Memorial Lecture by Pierre-Paul Schweitzer, Managing Director of the International Monetary Fund, in London on December 2, 1969.
“Special drawing rights are international reserves, allocated annually by the collective decision in the Fund of participating members. The rights are not used directly in settlement of international transactions, but are transferable from country to country against currency convertible in fact in accordance with a set of rules. Normally, basic periods for annual allocations will be of 5 years’ duration, but an initial basic period covering only 3 years has been decided upon. On January 1, 1970, a total of $3.5 billion will be allocated, distributed to participants in proportion to their quotas in the Fund. In 1971 and 1972 each, a further $3 billion will be allocated, making a total of $9.5 billion over the first basic period. This figure needs to be compared with a current total of world monetary gold reserves of about $39 billion, and a current total of international reserves of some $75 billion.
“While total world reserves, comprising gold holdings, foreign exchange, and reserve positions in the Fund have grown substantially, the total in relation to world trade has declined by over 50 per cent since the early 1950’s. After 1964 reserve growth became much less rapid than in earlier years; indeed reserves would have shown a decline not merely in relative but in absolute terms, had it not been for the creation of reserves as a byproduct of the Fund’s operations, swap arrangements, and other international credit facilities. The drying up of the more normal sources of reserve creation is largely due to private gold hoarding, and to the recent swing from deficit to surplus in the over-all balance of payments of the United States, on an official settlements basis, brought about by a massive inflow of capital into that country.
“Over most of the period any effect of declining reserve ratios was offset by a marked improvement in the distribution of reserves away from countries with ample reserves, notably the United States, toward countries whose reserves were less than adequate; this type of reserve redistribution has ceased to be a helpful factor since about the end of 1960 when the trend in the growth of total reserves began to flatten.
“It was in 1963-64 that international discussions of the problem of international liquidity were intensified. These discussions culminated in the adoption of amendments to the Articles of Agreement earlier this year (1969) embodying the plan for supplementing international reserves. The first decision to allocate special drawing rights, which has now been taken, was dependent on a consensus that, among other things, there were indications of an actual and prospective improvement in the international adjustment process. The improvement in the balance of payments of the United Kingdom, which has become more marked in the course of this year, greatly helped the reaching of agreement to activate the SDR scheme at this time.
“There can be no question that special drawing rights will have a fundamental influence on the adjustment process although it is difficult to predict their impact precisely. Like an increase in world monetary gold holdings, the allocation of SDR’s permits countries to add to their reserves without putting pressures on other countries’ balance of payments. It permits, as it were, an excess of surpluses over deficits in the world. which by itself should help to smooth the adjustment process and itself makes a contribution toward raising reserve ease to a satisfactory level.
“On the one hand one must expect that the allocation of SDR’s will enable surplus countries to adjust more easily, since they will have an addition to their reserves as a result of the allocation, and should therefore feel less need to generate further additions through surpluses. On the other hand, there is the danger that it will weaken the balance of payments discipline in deficit countries. However, the international machinery for keeping payments situations, surpluses as well as deficits, under review is in more continuous and effective operation than at any previous time. The Fund expects to play an increasing role in this process and in this way to exercise a useful influence in safeguarding the effective operation of the SDR scheme and thus to foster the future growth of the world economy and international transactions in accordance with the purposes for which the International Monetary Fund was established.
“Now that the international community has decided on a deliberate policy aiming at adequate reserves, can we hope that the international monetary system has weathered the storm of the crises of recent years? Can we tell ourselves that the period ahead should be one of continuous relative calm? I think it fair to say that the efforts that countries have put into international monetary matters over recent years has at least given us a greater chance of achieving a more stable monetary system than we have had at any time in the postwar period. In the end, of course, our success depends on our ability to continue the fruitful cooperation that we have gradually developed during the postwar period. Personally, I am convinced that countries will, in fact, continue and strengthen this cooperation. If my view is correct, then I believe that, whatever temporary difficulties may arise, we shall have an international monetary system that can properly serve the needs of all countries and help promote their economic well being.”