PART 2 Trying to save the system

Margaret De Vries
Published Date:
June 1986
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… I am gratified by the stress that has been laid on the need to strengthen the role of the Fund in the interest of ensuring success in the building of a new world monetary system.

Pierre-Paul Schweitzer, in concluding remarks to the Board of Governors, in Washington, September 29, 1972


Even as the Fund’s initial objectives were being attained in the mid-1960s, economists were calling attention to three problems in the Bretton Woods system: liquidity, confidence in reserve media, and adjustment.1 The liquidity problem concerned the inability of the system to provide adequate world reserves as the volume of international trade and financial transactions grew. This deficiency meant that countries turned to using the U.S. dollar for the bulk of their reserves which, in turn, put the United States in a position of having to run, or of being able to run, continuous balance of payments deficits. Reliance on the dollar also encountered the risk that the par value system could unravel at any time if the monetary authorities of other countries lost their confidence in the dollar and decided to convert their accumulated dollar holdings into gold. Hence, confidence in reserve media was tenuous. The adjustment problem came about essentially because of the lack of provision in the system for readily bringing about changes in exchange rates, especially for the main currencies. For a number of reasons, par values had become very difficult to change and imbalances in payments positions among the large industrial countries persisted.

Public officials concentrated on the liquidity problem, and after six years of intense negotiations, the SDR, a novel reserve asset to be allocated by the Fund, was created in 1969. Even before the first SDRs could be allocated, however, the par value system was being subjected to stresses more severe than any experienced since World War II. Exchange crisis became a regular feature of the international scene, especially after November 1967, when the pound sterling was devalued. 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 pillars of the Fund’s original Articles of Agreement—the system of agreed par values and the convertibility of dollars into gold—collapsed. The system that had functioned so well for a quarter of a century could work no longer. There was an urgent need for a rigorous reform of the international monetary system.

Thus the six years from 1966 to 1971 was a period distinctly different from either the preceding twenty years or the years after 1971. It formed a period in which the Fund was trying to hold together the Bretton Woods system through severe stresses and strains. In the twenty years 1945 to 1965 tremendous progress had been made toward the goals for which the Fund had been established and the Fund had become a successful instrument for international cooperation and consultation. The years after 1971, described in Part Three, were a period of reconstruction for the Fund; a time when major effort was exerted to reconstruct an international monetary system.

The first of the three articles of Part Two summarizes the three most important developments in the years 1966 to 1971: creation of the SDR, increased recourse to the Fund’s resources as many members encountered payments deficits, and stresses and strains on the par value system. During these years Pierre-Paul Schweitzer was Managing Director, and creation of the SDR as a reserve asset of the Fund is certainly his signal personal achievement. The second article recounts Mr. Schweitzer’s ten-year tenure, from September 1, 1963 to August 31, 1973. The third points out the broad transformations that had gradually come about in the world economy by the 1970s and how they help explain the emergence of crises in the international monetary system. The Chronology lists the main events from January 1, 1966 to December 31, 1971.

The Bretton Woods system consisted of the arrangements described on pp. 15–20.

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