IMF History (1966-1971) Volume 2

(A) Creation of Additional Reserves Through the International Monetary Fund (March 3, 1966)

International Monetary Fund
Published Date:
February 1996
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This paper sketches in outline two schemes which recommend themselves as worthy of consideration for the deliberate creation of international reserves.

The first of the two schemes, which is presented in Part I, is intended to illustrate how reserves, in the form of quasi-automatic drawing rights, could be created through the Fund with no amendments of its present Articles.

The second scheme, presented in Part II, envisages the creation by an affiliate of the Fund of reserve units transferable between countries.

While the basic elements of the two schemes are in most respects the same, certain differences arise from the fact that the arrangements in Part II, unlike those in Part I, are not designed to fit into the framework of the existing Articles of the Fund. Thus, the transfer of reserves created under Part II takes place directly between countries rather than indirectly through the Fund, is governed by rules giving greater freedom to the transferor than the Fund’s present rules on currencies to be drawn, and is operated on the basis of separate obligations to accept transfers rather than through the provision of additions to the Fund’s general resources. Moreover, the restoration of reserves in these forms once they have been used is not promoted under Part II, as it is under Part I, by repurchase but depends entirely on the subsequent operation of the rules and regulations affecting transfers.

Both schemes conform to the principle that reserve creation is the concern of all member countries, that all should participate, with due safeguards and in due degree, both in the distribution of newly created reserves and in the decisions which lead to its creation, that such creation should take place either through the Fund or in close association with it, in such a way as to strengthen the Fund in its present functions as the principal source of conditional liquidity and the guardian of an internationally agreed code of behavior with respect to foreign exchange policies and balance of payments adjustment.

Part I: Special Reserve Facility in the IMF

A. Creation and distribution

Whenever a decision is taken to increase reserves under this plan, all members of the Fund will be entitled to participate, in amounts broadly proportionate to quotas, by entering into the commitment set forth in D below. The plan provides for a drawing facility of the gold tranche type (hereinafter referred to as the special reserve facility), which may be expanded or contracted from time to time.

In order to maintain members’ conditional facilities unchanged in accordance with tranche policies and without prejudice to the compensatory financing facility, the Fund will be prepared to waive the 200 per cent limit on Fund holdings by the amount of the special reserve facility and the 25 per cent limit to the extent necessary. The special reserve facility will be expressed in absolute amounts and, therefore, the facility will not automatically change in amount as the result of subsequent quota changes.

B. Access to facility by members making conditional use

On the occasion of any reserve increase, members which at that time are already making a conditional use of the Fund’s resources will at that stage receive an addition to their conditional facilities instead of receiving the special reserve facility. If the conditional use is less than the amount of reserve creation, they will receive the balance in the form of an immediate special reserve facility. In effect, members making a conditional use of the Fund’s resources at the time of a reserve creation would be in the same position as if they had used the creation of the special reserve facility to make a repurchase which reconstituted their conditional facilities, except that they would not have had to pay a service charge on a drawing.

C. “Floating” character of facility

In order to enhance the value to members of the special reserve facility, members will be free to decide, subject to B above, whether to use the facility before or after using any part of their conditional facilities.

Without prejudice to the restoration of the compensatory financing facility under the applicable rules, all reductions in the Fund’s holdings of a member currency will first reconstitute its conditional facilities, then its special reserve facility, and finally its gold tranche. Members that fall within B will begin to acquire the special reserve facility as appropriate reductions in the Fund’s holdings of their currencies are made under this paragraph.

D. Provision of resources to Fund

In order to safeguard the Fund’s liquidity and provide against future contingencies, the plan will require that members extend to the Fund lines of credit in adequate amounts. Members will become entitled to participate in any increase in the special reserve facility allocated to them if they grant to the Fund a line of credit equal to the increase. The lines of credit will be coterminous with the special reserve facility, provided that, if the Fund agrees, a member may terminate its line of credit, whereupon its participation in the special reserve facility shall cease. The Fund may utilize any line of credit whenever it considers this necessary in order to replenish its resources for the operations of the Fund and in the light of its policies on currencies to be drawn. Claims against the Fund under the lines of credit will be reserve assets which the lenders can realize in the same way as gold tranche facilities and gab claims. The Fund, on its own initiative, may make repayment of a claim under a line of credit. The gold value of claims will be maintained and interest at an appropriate rate will be payable. As a result of this system, there will exist a pooling of all the Fund’s resources (currencies, gold, credit lines) for both its general transactions and those taking place as a result of the special reserve facility.

E. Transferability

As with gold tranche positions, the effect of transferring the special reserve facility will be obtained under the Fund’s drawing mechanism on the initiative of the “transferor” (drawing member) and under the guidance of the Fund’s policies on currencies to be drawn. The request will be treated in accordance with gold tranche policy and procedure. The “transferees” (drawee members) will acquire increased reserve positions in the Fund (in the form of larger positions in the Fund or under the credit lines).

F. Repurchase

Declarations of intent or undertakings to repurchase will not be called for in connection with the use of the special reserve facility. However, members will still be expected to make no more than a temporary use of the Fund’s resources, and to repurchase as their reserve positions improve whether or not the automatic repurchase provisions of the Articles bring this about. Members will continue to be subject to ineligibility for an improper use of the Fund’s resources.

It would seem advisable to adopt the same repurchase principles for drawings within the present gold tranche.

G. Decision making

Decisions relating to the creation, contraction, or termination of the special reserve facility will be taken by the Executive Directors. The decision will be adopted by a majority of votes cast but will become effective for any member agreeing to grant a line of credit when members having two thirds of the total quotas have so agreed, and provided that this proportion includes a special majority of certain specified members. This could be, for example, 9 of the members having the 12 largest quotas or three fourths of the members whose currencies have been used in Fund operations in substantial amounts during some specified number of preceding years.

The initial decision to create reserves can be for, say, five years in specified annual installments, with the lines of credit becoming available for use in corresponding amounts. The installments could be varied within the total but only under decisions taken and becoming effective in somewhat the same way as described in the foregoing paragraph. New decisions to create or contract reserves can be taken at any time, to become effective either before or after the expiration of the period for which an existing decision provides.

H. Settlement and liquidation

1. The settlement of accounts between the Fund and a member withdrawing from the Fund, including those resulting from the special reserve facility, will be governed by the Articles of Agreement (Article XV and Schedule D).

2. If the Fund were liquidated, the provisions dealing with the distribution of assets (Schedule E) will apply to all of the assets and liabilities of the Fund.

3. Provisions will be necessary to safeguard the interests of members having claims under lines of credit and of the Fund if the special reserve facility is terminated or reduced or if a member’s participation ceases.

Part II: Reserve Creation Through International Reserve Fund Units

A. Introduction

The establishment of a Fund unit scheme would involve new legislation for most members. If established within the Fund without the separation of accounts, it would involve extensive amendment of the Articles. If established within the Fund with the separation of accounts, the scheme would not call for elaborate amendment but nevertheless some amendment would be necessary. In what follows it is assumed that the units will be the liabilities of a Fund affiliate, herein referred to as the International Reserve Fund (irf). The basic provisions governing the irf would be included in the instrument establishing it; other matters would be left to subsequent decision making. The irf would become effective on satisfaction of the participation requirement contained in the basic instrument, which would permit the scheme to take effect with legislative action by fewer members than would be required for amendment of the Articles. The relationship between the Fund and the irf would be governed by the basic instrument and by agreement between the two if necessary.

B. Membership

All members of the Fund will qualify to be members of the irf if they so desire.

C. Reserve creation and distribution

On the adoption of a decision by the irf to increase reserves, all members of the irf will exchange claims with the irf in accordance with the rules of the irf, unless they decide not to participate in the particular increase. Members participating in this exchange will acquire claims on the irf expressed in irf units of gold weight, and the irf will acquire corresponding claims on the member.

The exchange of claims between the irf and participants in the increases in question will be in amounts broadly proportionate to imf quotas. On the occasion of any creation of units, participants that had made a net use of conditional drawing facilities of the imf will be required to reconstitute those facilities through repurchase up to an amount equal to the reserve units they then received. There could be provisions according to which by agreement between the imf and irf the allocation of units to a member on the occasion of a reserve increase could be deferred or withheld.

D. Value maintenance guarantee and interest

Units and counterclaims would enjoy a gold value maintenance guarantee and would bear interest.

E. Transferability

(i) Subject to the other provisions of E, members will reduce their holdings of units only if they are satisfied that this is to meet an overall balance of payments need. There might be an understanding as to the proportion of the decline in their reserves that countries will finance by reducing their holdings of units.

(ii) Each member will undertake to accept transfers of units from the irf or from other members in accordance with the rules established by the irf, but a member will not be bound to accept transfers to the extent that its holdings of units would exceed, say, three times the cumulative amounts of units allocated to it since the beginning of the scheme or if the proportion of its reserves held in forms other than units would fall below a specified minimum. Units in excess of these limits can be transferred without regard to balance of payments need.

(iii) The irf may establish additional rules to regulate the transfers of units. Any such rules would follow the broad principle that, subject to the limits under (ii), members’ holdings of units should converge broadly toward an equal percentage of their total reserves, except for members in payments difficulties. The rules would be so drafted as to give the transferor some discretion in the choice of transferee.

(iv) All transfers will be made at par against U.S. dollars, or against the currency of the transferee, if it is convertible, at a rate to be determined.

F. Institutional aspects

1. Establishment of the irf as an affiliate of the imf, as already indicated, will not require amendment of the imf Articles. It will be necessary to have minimum participation requirements for the establishment of the irf.

2. For decision making by the irf, requirements of majorities and effectiveness similar to those referred to in G of Part I will be included in the instrument establishing the irf.

G. Withdrawal and liquidation

It will be necessary to include in the instrument establishing the irf special provisions regarding withdrawal and liquidation that will ensure equitable treatment for all concerned.

Additional note

In order to enhance the usefulness of the units, it may be thought desirable to amend the imf Articles to permit the imf to accept units at par in lieu of gold in repurchase and payment of interest and on quota increases. In order to avoid detriment to the imf’s own liquidity if this were done, it would be necessary to require members of the irf to purchase units from the imf at its request in exchange for their own currencies at par. This amendment of the imf Articles would not be necessary in order to establish the irf, but could be carried out independently at any subsequent date.

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