9 The Decade of Pierre-Paul Schweitzer, 1963–73
- Margaret De Vries
- Published Date:
- June 1986
The ten years of Pierre-Paul Schweitzer’s leadership of the Fund was a time of significant change and growth for the institution, and of even more profound changes in world economic conditions. The membership of the Fund grew from 91 to 125 countries from September 1, 1963, when Mr. Schweitzer became its fourth Managing Director, until his term ended on August 31, 1973. Drawings on the Fund in these years totaled the equivalent of SDR 18 billion compared with SDR 4 billion in the preceding ten years. To take care of new members and new services, the staff was gradually increased from 521 to 1,335. Mr. Schweitzer’s tenure also included the construction of a major annex to the Fund’s old headquarters building (later occupied by the World Bank), and an entirely new headquarters, that was nearing completion when he left.
These are the statistics and physical signs of the Fund’s expansion under Mr. Schweitzer. In a sense they reflected a transformation of the world economy over the period in which he was Managing Director. The value of world trade, for example, doubled, and nations and regions became far more mutually dependent. Powerful economies emerged in every part of the globe, in contrast with the circumstances prevailing when the Fund was established at the end of World War II and the economy of the United States predominated.
From the start, Mr. Schweitzer’s service was preoccupied with adapting the original Bretton Woods system to the evolving world conditions. In his early years as Managing Director, the need for change in the system centered on the question of the creation and management of world liquidity; the result was the establishment in 1968 of the special drawing right facility, the SDR. In his later years, a rapid succession of exchange market crises signaled the need for additional changes in the system, and he was involved in laying the groundwork for a further, thoroughgoing reform. Significantly, the forum adopted for negotiating the reform, the Committee on Reform of the International Monetary System and Related Issues (Committee of Twenty), which started its work a year before Mr. Schweitzer left the Fund and was continuing as he departed, provided each Fund member with representation in the reform effort. These critical deliberations were thereby given the same global character that Mr. Schweitzer had impressed on the Fund’s work throughout his period of leadership.
CONCERN WITH INTERNATIONAL LIQUIDITY
When Mr. Schweitzer took office, liquidity was the issue of the day. Proposals for a new mechanism for creating additional liquidity had been made, but international monetary officials were by no means in agreement that any such mechanism was needed, let alone on the form it ought to take. In his first address to the Board of Governors, at the 1963 Annual Meeting, Mr. Schweitzer, who had then been Managing Director for only one month, expressed the view that “insofar as it is found necessary from time to time to expand the level of world liquidity by international action, the Fund will be found to be the instrument through which the bulk of the required expansion can most suitably be carried out.” He stated that the Fund’s policies and practices could be modified, and if need be its Articles of Agreement could be amended, to enable the Fund to continue its effective role in the provision of international liquidity. Furthermore, he announced that in the ensuing year the Fund would develop and intensify its studies on international liquidity.
The Group of Ten was also preparing to study questions relating to international liquidity, and Mr. Schweitzer visualized a close working relationship between the Fund and this group of major industrial countries in their parallel examinations. He himself was asked to participate in the meetings of the Group of Ten at the ministerial level, and to send representatives to the meetings of the Deputies. Studies by the Fund staff were to be provided to the Group of Ten.
Deliberations concerning international liquidity proceeded slowly for a few years. Answers had to be found for questions unfamiliar to past international monetary discussions: How should the world’s need for reserves be measured? Who should create new reserves, and how? How broad should be the group of countries that would receive the newly created liquidity?
Mr. Schweitzer stressed that he was searching for techniques that would encompass all countries. Addressing the National Foreign Trade Convention in New York on November 16, 1964, for example, he explained why he believed that all countries should be included in any arrangements for the creation of international liquidity. “Decisions determining the creation of new international liquidity directly affect all the world,” he said, and this “would suggest that all should have some voice in the decision.” He further stated that “it would seem equitable that all countries should have an opportunity to participate in the benefits,” that is, the substantial benefits of the creation of any new reserves, and “that it would seem particularly regrettable if the poorer countries were those excluded.”
In Mr. Schweitzer’s view, these considerations, among others, weighed heavily in favor of using the Fund for any arrangements which might be decided upon. The Fund could, “through responsible leadership, provide the unifying force among all countries, industrial and agricultural, developed and developing, creditor and debtor, rich and poor.”
When early in 1966 agreement among the countries of the Group of Ten on an international liquidity mechanism still seemed remote, the Managing Director, with the consent of the Executive Directors, put forward his own proposal in April of that year. He advocated a universal scheme for expanding international liquidity, a scheme that would encompass all members of the Fund and be applied in one form or another through the Fund. In an address before the Federation of German Industries at Kronberg in Taunus on April 25, 1966, he elaborated on the feasibility of a reserve unit scheme available to the full Fund membership and emphasized why any division of members into two groups should be avoided: “I can see no possible basis for dividing the member countries of the Fund in an objective and nondiscriminatory manner into the reliable few and the less responsible many.”
By the summer and fall of 1966 the idea that any reserve-creating plan would include all Fund members had become generally accepted. It was time to move on to the second phase of the discussions—meetings of representatives of the Group of Ten with the representatives of other countries. The most suitable way for them to exchange views was found to be a series of joint meetings between the Fund’s Executive Directors and the Deputies of the Group of Ten: one in Washington on November 28–30, 1966, a second in London on January 25–26, 1967, a third in Washington on April 24–26, 1967, and a fourth in Paris on June 19–21, 1967. Participating in these meetings were the Executive Directors and their Alternates, the Managing Director and the Deputy Managing Director, and two Deputies (one from the Ministry of Finance or the Treasury and one from the central bank) from each of the countries of the Group of Ten. Senior staff of the Fund also attended, as did representatives from the National Bank of Switzerland, the Organization for Economic Cooperation and Development (OECD), and the Bank for International Settlements (BIS).
Out of these meetings came the beginnings of a “contingency plan,” ready to be “activated” later if the need for actual new reserve creation should arise. That plan, called “An Outline of a Facility Based on Special Drawing Rights in the Fund,” was presented to the Board of Governors by the Executive Directors at the Annual Meeting in Rio de Janeiro in 1967. Mr. Schweitzer described the new scheme as “the most significant development in international financial cooperation since Bretton Woods.” On September 29, 1967, the Board of Governors adopted a resolution requesting the Executive Directors to proceed toward establishing this new facility in the Fund and introducing certain limited reforms in the Fund’s practices. To this end, they were to propose the necessary amendments to the original Articles of Agreement.
Amending the Articles for the First Time Amending the Articles for the first time proved to be a difficult task. Although the main points had been settled in the agreed Outline, differences on important issues still required reconciliation, and many complex technical problems had to be resolved. Agreement was finally reached, however, and a Proposed Amendment prepared by the Executive Directors was approved by the Board of Governors on May 31, 1968. Before it could become operational, this amendment to the Articles required the acceptance by at least three fifths of the membership of the Fund accounting for four fifths of the total voting power and, in addition, required members having 75 percent of the total quotas to deposit instruments of participation in the new Special Drawing Account. Mr. Schweitzer, who had just been reappointed to his second five-year term, at the Annual Meeting in 1968, urged “all member countries, whether they be small or large, to proceed as rapidly as possible” with these steps.
The First Amendment took effect on July 28, 1969, and the Special Drawing Account came into being one week later on August 6, 1969. The term “reform” of the Fund used at the time of the First Amendment referred to those amendments that went into effect simultaneously with the amendments incorporating the SDR facility in the Articles. Actually, the changes involved in this “reform” were few: they introduced the need for a special majority of 85 percent of voting strength before certain decisions could take place (decisions pertaining to adjustments in quotas or payments of increases in quotas resulting from a general review of quotas) and altered a few provisions applicable to the use of the Fund’s resources.
DRAWINGS FROM THE FUND
After Mr. Schweitzer took office in 1963, drawings became very large, especially in the late 1960s. By the time the SDR facility had gone into effect in 1969, the payments imbalances of industrial members, the frequent crises that had begun to erupt in foreign exchange markets, and the continuing balance of payments problems of developing members had led to unprecedented recourse to the Fund’s financial assistance. Drawings in the two years 1968 and 1969 alone came to $3.5 billion and $2.5 billion, respectively—the largest annual amounts since the Fund commenced operations in 1947. Most of these drawings took place under stand-by arrangements, as the Fund’s policy on the use of its financial resources gradually became tantamount to its policies on stand-by arrangements. During the years that Mr. Schweitzer was Managing Director, the Fund approved nearly 200 stand-by arrangements with over 40 members, which included the whole range of industrial members, other developed members, and developing members. In 1968 the Executive Directors reviewed the conditions applying to stand-by arrangements and reached a comprehensive decision on them.
During Mr. Schweitzer’s tenure, in order to increase assistance to developing members, the Fund also extended and liberalized its compensatory financing facility, which had been set up in 1963 to give assistance to primary producing members experiencing temporary shortfalls in their export earnings. By mid-1973 over 20 developing members had made use of this facility. In June 1969, also with a view to helping members who were exporters of primary products, the Fund introduced a facility to finance buffer stocks, and by 1973 some developing members had used this new facility.
To help finance expanded drawings, Mr. Schweitzer guided the Fund through its second and third general increases in quotas, which nearly doubled the resources of the Fund over the 1963 total. The Fourth Quinquennial Review of Quotas took place in 1964–65 and resulted in a 25 percent general increase, plus several special increases, with the new quotas taking effect on February 23, 1966. The Fifth General Review of Quotas took place in 1970. That Review provided for an increase of quotas to approximately $28.9 billion, an increase of about $7.6 billion, or 35.5 percent over the then existing resources of the Fund. This Fifth Review involved not only a general increase in quotas but also several special adjustments to bring members’ relative quotas more into line with their changing positions in the world economy.
Amid the worsening strain to the international monetary system, the Managing Director proposed to the Board of Governors at the Annual Meeting in September 1969 that the SDR facility be “activated,” by allocating the new SDRs for an initial three-year period to begin January 1, 1970. After this proposal was approved, approximately $9.5 billion in SDRs was created and distributed from 1970 to 1972. As Mr. Schweitzer said in his Stamp Memorial Lecture in London on December 2, 1969, 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.”
CRISES IN EXCHANGE MARKETS
Some of the most dramatic occurrences during Mr. Schweitzer’s ten-year tenure pertained to gold. In late 1967 and early 1968 a crisis erupted in gold markets when speculators, anticipating a rise in the official price, bought gold in massive amounts. Continued support of gold at the existing official price of $35 an ounce proved to be excessively costly for the official reserves of the members of the Gold Pool, an arrangement formed by seven central banks in 1961 to buy and sell gold in the London market in order to stabilize the price. Therefore, on March 16 and 17, 1968, the governors of these central banks met in Washington and decided that only in transactions with monetary authorities would they buy and sell gold thereafter at $35 an ounce. In effect, private transactions for gold would take place in a separate market where the price would be freely determined by demand and supply. Mr. Schweitzer, who had participated in the meeting, supported this decision and urged other members of the Fund to cooperate with it.
The establishment of this two-tier gold market in March 1968 was destined to transform the Fund’s long-standing gold policies. After about a year and a half of discussion concerning which of the two gold markets should receive South Africa’s large amounts of newly mined gold, it was agreed at the end of 1969 that South Africa would offer gold for sale to the Fund at the official price in situations and quantities that were carefully specified. After the arrangements had been made for the Fund to buy gold from South Africa, revised policies also had to be worked out for the Fund to sell gold from its expanding holdings. Changes in the policy for gold sales to members were introduced in 1971. Detailed guidelines were established by which the Fund sold gold to members (1) to mitigate the secondary impact on the gold holdings of members when other members bought gold from them to pay their increased subscriptions to the Fund and (2) to replenish the Fund’s holdings of particular currencies. As a result of these developments, the Fund’s transactions and operations in gold in 1970 and 1971 became the largest so far in its history.
Still further major disturbances in the international monetary system from 1967 onward catapulted international monetary events into the forefront of world attention and presented very difficult problems and challenges to the authorities responsible for economic and financial policies all over the world. Chronic imbalances in the structure of international payments that had persisted for over a decade, a phenomenal growth in short-term capital balances, sudden and volatile movements in these balances from one money center to another, and the increasing interdependence of national economies combined to disturb the smooth functioning of the international monetary system. Even acting in unison, the monetary authorities of the main industrial countries and the international monetary authorities were much less able than before to counter the effects of capital outflows; exchange rate changes were precipitated for the pound sterling in November 1967, for the French franc in August 1969, and for the deutsche mark in October 1969.
In mid-1971 further developments struck at the heart of the monetary arrangements designed at Bretton Woods. Five European members found it necessary to take exchange rate action, including resort by the Federal Republic of Germany and the Netherlands to the floating of their currencies. On August 15, 1971, impelled by a current account deficit of what at the time was considered an intolerable magnitude, the U.S. authorities suspended the convertibility of dollars held by the monetary authorities of other countries into gold. Par values and convertibility into gold were at an end.
Realignment at the Smithsonian In December 1971 a realignment of currencies was worked out in the Smithsonian agreement by the Group of Ten. Thus, in the words of Mr. Schweitzer, who participated in the meeting, “some measure of order in international economic relations … replaced the uncertainty that prevailed during much of 1971.”
These disturbances, as Mr. Schweitzer stated, “pointedly raised new questions concerning the effectiveness of the international adjustment process” and, as he explained to the Board of Governors at the Annual Meeting on September 25, 1972, they “strongly affected the Fund’s activities in three major areas. First, it was necessary to intensify re-examination of the structure of exchange rates. Second, the conduct of the Fund’s financial operations required new methods and procedures…. Third, the Fund’s work in the area of international monetary reform was given added urgency.”
To help bring about the reform of the international monetary system, the Board of Governors on July 26, 1972, adopted a Resolution setting up a Committee of the Board of Governors on Reform of the International Monetary System and Related Issues. It consisted of one member appointed by each group of countries appointing or electing an Executive Director of the Fund, with Mr. Schweitzer participating. This Committee (known as the Committee of Twenty) held its inaugural meeting in Washington on September 28, 1972, and a second on March 26–27, 1973. Still further disturbances in the international monetary system took place in early 1973, when another devaluation of the U.S. dollar, the second in 14 months, occurred.
EXPANDING TECHNICAL ASSISTANCE
Not as spectacular as the monetary crisis of the years in which Mr. Schweitzer was Managing Director, but nonetheless very important, was the expansion of the Fund’s program of technical assistance, especially to the growing number of developing members. During his tenure two departments for specialized technical assistance were created—a Fiscal Affairs Department, to advise members on their fiscal problems and to carry out technical assistance assignments of long duration or of a highly specialized nature, and a Central Banking Service, to appraise requests for assistance in connection with central banking activities and to provide an appropriate expert. The IMF Institute, for the training of monetary officials from members, was also formally inaugurated in 1964. In addition, the staff of the five area departments (African, Asian, European, Middle Eastern, and Western Hemisphere), of the Bureau of Statistics, and of the Exchange and Trade Relations Department carried out an increasing number of technical assistance assignments, both as part of their regular work and on special request. Indeed, technical assistance had become one of the Fund’s major activities.
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In the midst of these developments, Pierre-Paul Schweitzer became an increasingly prominent world figure in monetary affairs. He was called upon to make speeches before banking groups, international commissions and conferences, and the like; he appeared on a number of occasions before the press and on television; he appeared on the cover of Time magazine; and he was awarded honorary degrees from the universities of Leeds and Wales, and from Harvard, Yale, George Washington, and New York Universities. Within months after he became Managing Director, he visited several member countries in Latin America, and later traveled extensively throughout the world to promote international monetary cooperation and strengthen members’ relationships with the Fund.
A man of unusual charm, warmth, and modesty, the officials with whom he dealt became his friends, and he was admired, respected, and held in great affection by his staff.