PART 3 Operating in a troubled world economy

Margaret De Vries
Published Date:
June 1986
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I am confident that the Fund, sustained by the unfailing cooperation of its members, will prove capable of responding flexibly, as it has done so often in the past, to changing conditions in the world economy.

H. Johannes Witteveen, in concluding remarks to the Board of Governors, in Washington, September 30, 1977


The seven years from January 1, 1972 to December 31, 1978 were the most complex and difficult that the Fund had so far experienced. First came a year of uncertainty in which monetary authorities tried to hold the exchange rates agreed in December 1971. Then in March 1973 the system of par values broke down altogether. With the end of the par value system several critics went so far as to intimate that the Fund had outlived its usefulness. The collapse of par values and the introduction of exchange arrangements contradictory to the Articles of Agreement by nearly all members were, however, only the start of the troubles that the Fund had to face. Beginning in 1973, the world economy became radically different from that of the previous 25–30 years. This much more troubled world economy meant that throughout the rest of the 1970s the Fund’s members were plagued with the deepest economic and financial problems of four decades. Inflation reached historically high levels in most industrial members. Steep increases in prices for crude oil brought on massive balance of payments deficits for all members except for a few oil exporters which, in turn, were suddenly faced with massive surpluses. These developments brought to an end the efforts of public officials to agree on a fully reformed international monetary system; they decided instead to let a new system evolve out of existing arrangements. Then, the deepest worldwide recession since the 1930s ensued in 1974–75, and in a hitherto unknown phenomenon, rising prices coexisted with high unemployment in industrial countries. Even after recovery, the economies of the main industrial countries grew much more slowly than in the 1960s. The new floating exchange rates introduced in lieu of par values underwent wide fluctuations. Intense speculation in gold caused its price to soar to unprecedented levels, obviating its use for settling financial transactions. As non-oil developing members borrowed to finance their huge deficits, several rapidly piled up external debts. These circumstances put international monetary cooperation to its severest test since World War II.

In response, the Fund undertook to reshape its functions and to redirect its activities. By December 1978 the Second Amendment of the Articles of Agreement had come into force, concluding efforts to reform the system. The international monetary arrangements evolving since August 15, 1971, when official convertibility for the dollar was suspended, were now sanctioned by international law. By December 1978, moreover, the disequilibrating effects on the imbalances in international payments immediately following the huge jump in oil prices of 1973 had just about worked themselves through the financial system, which had somehow managed to cope. The repercussions of what was later to be termed “the first round of oil price rises” were regarded as over.

The first article describes the highlights of the years 1972 to 1978. The second describes the emerging international monetary system as of the middle of 1975 when important controversies were going on about several specific features of the system; these controversies were only finally resolved in January 1976. The article thus focuses on the disputes that occurred before agreement was reached on the features of the system acceptable in the Second Amendment. For almost five of the seven years from 1972 to 1978 (from September 1, 1973 to June 16, 1978), H. Johannes Witteveen was Managing Director; the third article describes his tenure in the Fund. The fourth article reviews the turbulent developments in the world economy during the 1970s. The last article describes the origin and achievements of the Interim Committee of the Board of Governors on the International Monetary System, from the time it was established in October 1974 through October 1985. The Chronology lists the main developments from January 1, 1972 to December 31, 1978.

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