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Finance & Development, September 1980
Article

Reflections on the international monetary system: A report on the 1980 Per Jacobsson Lecture

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1980
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Albert S. Gerstein

Guillaume Guindey began by assessing the highlights of the existing international monetary system and the flexible, realistic, and pragmatic way in which it has been able to adapt and evolve.

He noted that while par value changes are no longer subject to the approval of the International Monetary Fund, and deficit countries can obtain credits through the private sector without having recourse to the Fund, the latter continues to exercise influence. He observed that we tend to overlook what members might be tempted to do but for the Fund’s existence.

Moreover, Mr. Guindey argued, the existence of other forums for monetary cooperation neither emasculated the influence of the Fund nor weakened the system. The BIS, now celebrating its 50th Anniversary, offers a special vehicle for cooperation among central banks, and works in harmony with the Fund. Indeed, the late Per Jacobsson, Managing Director of the Fund from 1956 to 1963, and the late Gabriel Ferras, General Manager of the BIS, had moved from one organization to the other to positions of important responsibility. Other forums in the international community, such as the Organization for Economic Cooperation and Development (OECD) and the European Monetary System (EMS), and small working groups in Basle, all serve in a complementary way to solve problems arising in particular countries or in relations between countries. Mr. Guindey observed that in all these interrelationships the Fund is in a position to ensure that nothing is done within those other forums to run counter to the Fund’s fundamental objectives.

He observed, furthermore, that neither floating exchange rates nor fixed exchange rates should in reality have a negative impact on the functioning of the international monetary system. The recent measures adopted by the United States to avoid erratic fluctuations in exchange rates for the U.S. dollar and the ability of the EMS member countries to make adjustments in parities as needed have resulted in a reduction in the difference between managed floating rates and fixed but adjustable parities.

Finally, he discussed the controversial issue of the role of gold in the existing system. In his view, gold must necessarily play an important role because of its particular qualities. He was pleased to note that the system had adopted a pragmatic approach to the issue of gold, namely, to treat it like any other commodity. The official price, as previously prescribed in the Articles of Agreement in the Fund, has been deleted. This new approach permitted central banks to choose any method for accounting for their reserves in gold.

Suggested improvements

Mr. Guindey then addressed unresolved problems. He thought that too much of the burden for meeting economic problems has been placed on the monetary authorities and argued that there should be greater recourse to fiscal measures, especially in the field of budgetary policy. He recalled the OECD report of the mid-1960s on this issue, and thought more attention should be paid to the recommendations of that report than in fact has been paid, although, he added, monetary policy is a good vehicle in the fight against inflation and as a way to stem the tide of depreciating currencies.

Mr. Guindey paid particular attention to the “vulnerability” of the dollar. He noted that this vulnerability stems, at least in part, from an “overpessimistic appraisal of the external accounts of the United States.” He pointed out that, of the total volume of balance of payments (BOP) deficits over the past 20 years, only one sixth resulted from current account deficits. The remainder was accounted for by deficits in the capital account. The latter, he suggested, represented substantial overseas investment which added to income from abroad and potential for substantial capital gains. A proper evaluation of the true value of the dollar must take such considerations into account. On the other hand, it should be recognized that the accumulating “over-hang” of foreign-owned U.S. dollars, subject to political and economic pressures, leads to instability and vulnerability. Instability and erratic behavior of the exchange rate for the dollar, especially in light of the existing inflation, has been a source of concern. Mr. Guindey observed with satisfaction that, beginning in 1978 and later in 1979, the United States showed that it was prepared to take measures to deal with the instability of the dollar at the same time as it sought cooperation among central banks. In his view, the problem of the continuing vulnerability of the dollar, because of the overhang, should be dealt with by actions that supplement the 1978 and 1979 measures.

This could be done through “proper cooperation between the principal creditors and the debtor country itself,” in the form of loans by foreign central banks denominated in their currency to the central bank of the debtor country. This would ensure the financial support by the central banks and, in the case of the dollar, would lessen its vulnerability to possible speculative attacks. He noted that some might argue that the foregoing proposal would have little chance of acceptance in the United States. However, there is ample precedence in the Roosa bonds, the swaps with certain central banks, and the issue of Carter bonds in the Federal Republic of Germany and Switzerland. In his view, common sense dictates the validity and therefore the acceptability of this approach. It affords the necessary financial support and, at the same time, places the burden of intervention and the exchange risk on the debtor country.

In addition, he felt that consideration should be given to “ad hoc agreements between central banks” that would allow those wishing to diversify their reserves (in the form, for example, of accumulations of dollars as a result of past intervention) “to buy Roosa bonds denominated in currencies other than the dollar, directly from the Federal Reserve System.” This would reduce the overhang and would not be likely to lead to a stampede, as the bonds would yield “a much lower interest rate than dollar assets.” Moreover, the very existence of such an arrangement “would help increase the confidence of all dollar holders in the world.” In addition, Mr. Guindey recalled that the increase in the price of gold has provided the U.S. Treasury with “a huge capital gain in dollars” that was “large enough amply to offset the merely contingent exchange losses which might be incurred on account of some indebtedness to other central banks in currencies other than the dollar.” His recommendation, in short, was for a new reserve instrument (in addition to such existing instruments as the dollar and the special drawing right), namely, “claims on the Federal Reserve System (or perhaps on other central banks) denominated in currencies other than that of the debtor.”

In his concluding remarks, Mr. Guindey observed that “in addition to the intrinsic vulnerability of the dollar unfortunately resulting from domestic inflation in the United States, there is an artificial vulnerability which it should be possible to remedy by rather simple means. In other words, I believe that the illness of the dollar is to some extent illusory.”

As for the international monetary system, he concluded that, aside from what governments might suggest by way of additional changes in the Articles of Agreement of the Fund, his suggestions for improvements through adaptation to the present system should be considered. In this regard, he stated “… we live in a viable system which, though not perfect, has very positive aspects, and which could be improved from the standpoint of effectiveness in particular if a number of arguable views were to be corrected.”

Comments by Charles Coombs

In his commentary, Mr. Coombs expressed basic agreement with the suggestion of more liberal use of exchange rate guarantees by debtor countries in connection with international financing in the effort to stabilize the international monetary system. In effect, he thought that Mr. Guindey’s proposal resembled the operational procedures that had been devised in the 1960s for similar objectives.

Mr. Coombs, however, noted that the circumstances of the 1980s, namely, the absence of parity for the U.S. dollar, were different from those of the 1960s when the principal intervention in support of the dollar was by foreign central banks in their own markets. With the dollar subject to its present wide fluctuations, the U.S. authorities would want to take the major intervention decisions themselves rather than have them made by the foreign central banks. In his view, the Federal Reserve could, on occasion, seek a foreign central bank to support a certain exchange rate level with the understanding that the resultant dollar receipts would “be mopped up by the Federal Reserve through a drawing on the swap line and consequent provision of an exchange guarantee.” An enlarged scale of exchange guarantees should involve prior, informal, and bilaterally negotiated agreements with selected central banks rather than an agreed formal principle to initiate support operations. Those ad hoc, agreed arrangements should not preclude acceptance of uncovered dollars by foreign central banks, or uncovered foreign currency by the Federal Reserve, in support of the stability of the international financial system. As for reserve diversification, this should be handled by the BIS through flexible arrangements among a small number of countries.

Moreover, whereas such international credit facilities as Roosa bonds, swaps, and so forth, were unconditional during the 1960s, conditionality should now be accepted as an element in the negotiated arrangements. Conditionality was applied in the mid-1970s “when the dollar temporarily shifted to creditor status.” Mr. Coombs felt that by the same token, the United States “can hardly object to the same standards of discipline that it has required of others.” Recourse to conditionality, in his view, would give creditor countries some assurance against an inflationary impact as a result of the use of the credit facility.

With respect to gold, Mr. Coombs agreed with Mr. Guindey on the benefit to be derived from defusing the controversy around the issue. He added that while he would not favor a return by the United States to official convertibility of the dollar into gold at a new, official, fixed price, he saw no case for getting rid of gold as a monetary reserve asset. In this regard, he observed that the efficiency of the international monetary system would be enhanced if the United States sold gold in support of the dollar to foreign central banks in exchange for their respective currencies. He expressed the hope that certain central banks would “become sufficiently confident of the future of gold as a monetary reserve that they might stand ready to supply their currency in exchange for U.S. gold at a rate not too far off prevailing gold market price levels.” He concluded by stating: “Such gold sales to foreign central banks at U.S. initiative would be the most effective way of mobilizing the enormous strength of the U.S. gold reserve position in support of an orderly functioning of the international monetary system.”

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