Chapter 23: The Wood and the Trees

International Monetary Fund
Published Date:
February 1996
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In the Preceding Chapters we have been traversing a wood so full of undergrowth that the reader may not have been able to distinguish even the individual trees. It will perhaps be worthwhile, as we close, to look back very briefly at the path we have trodden since 1941, and to try to trace in the broadest outline the evolution of the Fund from the vision that inspired White and Keynes to the living organism of 1965. It will suffice to consider what has happened in five main areas: the size of the Fund, exchange rates, exchange restrictions, drawings, and administration.

Size of the Fund

The original plan for the Fund was more heavily influenced by the caution proper to the United States, whose resources would be chiefly in demand, than by the expansionist hopes of the United Kingdom and some other powers. It therefore took the form of a fixed subscription, rather than of an open-ended commitment to permit overdrafts, for which Keynes had hoped. And the total of quotas, $8.8 billion, while appreciably larger than the $5 billion originally mentioned by White, was only about one third the size of the resources which Keynes wished to make available.

Similarly, restraining influences have been brought to bear on the subsequent growth of the Fund. There have been only two general increases in quotas, although four quinquennial reviews have been made, as provided in the Articles. Further, while some disparities in quotas have been corrected by selective increases, the most important additions to the Fund’s holdings of needed currencies have been provided in the qualified form of the General Arrangements to Borrow rather than in the unrestricted form of quota increases.

Use has been made of the powers given to replenish the Fund’s holdings of needed currencies by the sale of gold and by drawing on the General Arrangements to Borrow. There has, however, been no recourse to the “scarce currency” clause. The way out of the danger of a scarcity of international liquidity has in fact been sought not through the provisions in the Articles drafted at Bretton Woods, but by the addition of new Articles since 1965.

Exchange Rates

Both White and Keynes envisaged a postwar world in which each member country would have a par value for its currency. White was concerned to stress that these par values should remain as far as possible stable, and should be changed only with the consent of the world community. Keynes shared these views to a great extent, although he wished to retain some freedom for the individual country to change its rate if necessity arose. Both, therefore, expected that in the years to come the problem for the Fund would be to decide whether a member was justified in making a desired change in its par value. As it has turned out, formal devaluations have been fewer than anticipated, and the Fund has found its members reluctant to change their exchange rates even at times when such changes might be the best solution of their difficulties.

One reason for this difference between expectations and experience is, of course, that the par value system itself has been less universally adopted than had been planned. The system has been fully accepted, and indeed taken for granted, by all the major developed countries that are members of the Fund, so that the overwhelming bulk of world trade is conducted in currencies of fixed value. But among other Fund members the situation has been different. At the end of 1965 there were 23 member countries that had no par values, and 17 others whose par values were wholly or mainly ineffective. The attitude of the Fund toward par values for such members has been influenced by a realistic acceptance of the fact that a par value is of little usefulness if it is ineffective. It is symptomatic of this change of view that, whereas except for members that had been occupied by the enemy the Articles envisage a par value as a prerequisite to a drawing on the Fund, the Board in 1964 agreed that any member country might draw before it fixed a par value. One reason for this was that such a drawing might assist the country to achieve a par value; another, more significantly, that it would make it unnecessary for a member to declare a possibly ineffective par value merely in order to qualify to draw from the Fund.

A number of consequences have flowed from this greater flexibility in the exchange rate field. One was that in its early years the Fund was much involved with the problem of broken cross rates. Another, that the persistence of multiple currency practices has required the Fund to evolve sophisticated techniques for the evaluation of such practices. Thirdly, fluctuating exchange rates, although not contemplated by the Articles, have been found the best solution for certain difficult situations, and have been tolerated, and indeed encouraged, by the Fund where these situations existed.

Closely related to the problems of exchange rates has been the Fund’s concern about the price of gold. Because par values are expressed in terms of gold, the Fund has been apprehensive that the establishment of premium prices in gold markets might undermine exchange parities, and during the first five years of its existence it sought actively to discourage such prices. In 1951 it became apparent that the Fund did not have the power to enforce a restriction of the price of gold in free markets to $35 an ounce, and its policy was changed to one of moral suasion. When in 1960 the price of gold again got out of control, its correction was left to the exertions of the Western European countries and the United States. The further change in policy in 1968 lies outside the scope of this history.

Exchange Restrictions

The most significant variation between the plans of the founding fathers at Bretton Woods and the evolution of the postwar world has been the limited use made of Article VIII. At Bretton Woods the expectation was that all member countries would graduate to Article VIII after a comparatively short transitional period. The length of this period was nowhere specified, but the evidence suggests that Keynes was thinking of some five years, while White was expecting that soon after the end of hostilities members would begin to accept the obligations of convertibility. It was not, however, until 1961—more than sixteen years after Bretton Woods—that these obligations were accepted by the majority of the members whose currencies are important in international trade; and by the end of 1965, out of a total membership of 103, only 27 members had fully accepted the obligations of Article VIII, thereby making their currencies convertible in the Fund sense of the word.

As a consequence of the continued resort by members to Article XIV, the consultations with members which are prescribed under that Article have become one of the main activities of the Fund. And because the usefulness of such consultations rapidly became apparent, they were extended in 1961 to members that had accepted the obligations of Article VIII—although on a voluntary basis as regards members that have no restrictions requiring the Fund’s approval. (Nothing was said about such consultations in the Bretton Woods Agreements.) As practiced today, the annual consultations deal not only with exchange restrictions but with all aspects of the member’s economic life. They fulfill the function which White had envisaged as one of the most important for Executive Directors: to become closely acquainted with the circumstances of each member, so as to be able to make informed decisions on drawings or other requests which the member might put forward.

Use of the Fund’s Resources

Of the several ambiguities in the Articles of Agreement—some intentional and some not—one stood out from the beginning as of prime importance. Some members understood that the Articles entitled each member to draw, without challenge from the Fund, up to 25 per cent of its quota each year. Others believed that the Fund had the right to require any member to justify any drawing. This issue—that of automatism versus conditionality in drawings—divided the Board for several years. For a time, small drawings—less than 5 per cent of a member’s quota in any month—were effected automatically in accordance with the terms of Rule G-5. Very soon, however, the Board began as a matter of course to examine each request for a drawing. As its standards became better known, member countries tended to make informal inquiries before submitting a formal application; many tentative requests were not proceeded with as a result of discouragement received at that stage. In consequence, very few were actually refused, except that while the United States was priming the pump in Europe through Marshall Aid the Board declined to permit the European recipients of that aid to draw from the Fund.

The catalyst which ultimately precipitated agreement on a policy for the use of the Fund’s resources was a realization that the repurchase provisions in the Articles of Agreement were ineffective to ensure that drawings would be repaid within a limited period. It followed that the temporariness of members’ use of the Fund, which all agreed was intended at Bretton Woods, could be secured only if drawings were specifically limited in duration. This limitation, which was the essential part of the Rooth Plan for the use of the Fund’s resources, requires that drawings shall be repaid within five years. In this aim the Rooth Plan has been largely successful—but not wholly so, because a few countries, by making repeated drawings, have been indebted to the Fund for substantially longer than five years at a time.

In one respect, however, the Fund’s policy has been modified toward greater automaticity; there has been an increasing tendency for drawings within the gold tranche to be handled with a minimum of inquiry and a maximum of speed. The deliberate intention has been to encourage members to regard the right to draw in the gold tranche as a part of their exchange reserves. This culminated, after the period covered by this volume, in an explicit statement that drawings in the gold tranche would be granted automatically. Concurrently, the recourse to drawings by members has ceased to be regarded necessarily as a sign of weakness.

Drawing rights have also been extended by the provision of special assistance to compensate for fluctuations in export incomes, which (as devised in 1963 and 1966) has added 40 per cent to the range over which drawings by the members concerned can extend.

Of still greater importance to the Fund has been the evolution of stand-by arrangements. These were not specified in the Articles, but from small beginnings in 1952 they have grown to a major activity of the Fund. Only a few drawings today are not preceded by stand-by arrangements. And the Fund has found it possible, by stipulating conditions of increasing precision in such arrangements, to exert through them effective pressure on drawing members to follow appropriate policies.

It is right to add that, although the principle of automaticity has been conceded only for drawings in the gold tranche, the Board today would wish never to withhold approval of any drawing. At the most, Directors will make plain during the discussion of a request, for the future guidance of the staff, any features which they consider to be unsatisfactory. As a result, unwritten but clearly understood guidelines have been evolved, derived from the Board’s consideration of past drawings. These enable the staff to recommend with confidence to members the steps which should be taken to ensure the acceptance of their requests, and permit of members putting forward requests with the assurance that they will be granted.


There is one more feature of the Fund’s evolution which calls for comment: administration. It was never possible that, as Keynes had wished, the Fund should have been a purely technical institution, run by internationally minded experts; its functions have necessarily had political consequences of too far-reaching a kind. It has followed that the decisions of the Fund have perforce taken account of the national attitudes of the countries represented on the Board. It has followed, also, that the Board has remained the full-time supervisor of the Fund’s work rather than the part-time court of appeal which Keynes had in mind.

Nevertheless, in at least three respects the work of the Board has been modified by experience. In the first place, formal voting, except on matters for which the Articles require such voting, has almost disappeared from the Board’s practice. With it has gone some of the rigidity and formality of the Board’s procedures—a development enhanced by the invention of different kinds of informal Board meetings for the preliminary exploration of sensitive subjects. In the second place, the extensive use of the lapse of time procedure has removed the need for debate in connection with a large proportion of the more routine decisions that the Board has to make. And in the third place, because the discussions preparatory to the annual consultations have been conducted by members of the Fund staff while visiting the countries concerned, the consultation procedure has necessarily enhanced the extent to which the permanent staff, rather than the Board (which has on the average turned over its membership about once every five years) has become the repository of detailed technical knowledge of members’ economies and practices. As a result, the stand-by arrangements which are keyed to these practices have been devised by the Fund’s technicians. Similarly, the selection of currencies to be used in purchases and repurchases has become the responsibility of the staff. Nevertheless, both these arrangements and the newer facilities which have been grafted on to the Articles—compensatory financing of export fluctuations, General Arrangements to Borrow, and most recently the Amendment of the Articles of Agreement—have been shaped by the staff under the guidance, and subject at all times to the decision, of the Board.

It was made clear at the outset of this Chronicle that its objective is not to judge the success or failure of the Fund, but to recount its plans and its activities as they have unrolled from day to day. But the reader may well feel from the brief notes given in this chapter that if the Fund has succeeded, it is because of the flexibility which it has brought to its task. Without departing from the design of its founders the Fund has been able to add new dimensions to its scope. The new facilities that it has devised after the end of the period here covered represent only the latest in a series of developments which have led from the rigidity of a legal code to the flexibility of a living organism.

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