Chapter

CHAPTER 17 Derivation and Significance of the Fund’s Resources

Author(s):
International Monetary Fund
Published Date:
February 1996
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Author(s)
J. Keith Horsefield

The financial resources which the Fund can make available to its members originate in three ways. The first and largest source is the subscriptions paid by members when they join the Fund; the second is the excess of the Fund’s income—mainly consisting of charges levied by the Fund for the use of its resources plus its income from investments—over its expenditures; the third is borrowing from members. For the purposes of the present chapter it is the total rather than the constitution of the Fund’s holdings of members’ currencies that is relevant. The replenishment of the Fund’s holdings of individual currencies by the sale of gold is reviewed in Chapter 19.

QUOTAS AND SUBSCRIPTIONS

Provisions of the Articles

The principal Article in connection with quotas and subscriptions is Article III, of which the contents, partly summarized (in brackets), follow:

Section 1. Quotas.—Each member shall be assigned a quota. [Members represented at Bretton Woods have quotas set out in Schedule A to the Articles.] The quotas of other members shall be determined by the Fund.

Sec 2. Adjustment of quotas.—The Fund shall at intervals of five years review, and if it deems it appropriate propose an adjustment of, the quotas of the members. It may also, if it thinks fit, consider at any other time the adjustment of any particular quota at the request of the member concerned. A four-fifths majority of the total voting power shall be required for any change in quotas and no quota shall be changed without the consent of the member concerned.

Sec 3. Subscriptions: time, place, and form of payment.—(a) The subscription of each member shall be equal to its quota and shall be paid in full to the Fund at the appropriate depository on or before the date when the member becomes eligible under Article XX, Section 4(c) or (d), to buy currencies from the Fund.

(b) Each member shall pay in gold, as a minimum, the smaller of

  • (i) twenty-five percent of its quota; or

  • (ii) ten percent of its net official holdings of gold and United States dollars as at the date when the Fund notifies members under Article XX, Section 4(a) that it will shortly be in a position to begin exchange transactions.

Each member shall furnish to the Fund the data necessary to determine its net official holdings of gold and United States dollars.

(c) Each member shall pay the balance of its quota in its own currency.

(d) [Provision for countries occupied by the enemy]

Sec. 4. Payments when quotas are changed.—(a) Each member which consents to an increase in its quota shall, within thirty days after the date of its consent, pay to the Fund twenty-five percent of the increase in gold and the balance in its own currency. If, however, on the date when the member consents to an increase, its monetary reserves are less than its new quota, the Fund may reduce the proportion of the increase to be paid in gold.

(b) [Provision for reduction in quota]

Sec. 5. Substitution of securities for currency.—[The Fund must accept nonnegotiable noninterest-bearing securities in place of currency to the extent that it deems the currency not to be needed for its purposes.]

Two provisions elsewhere in the Articles safeguard members’ rights in relation to quotas. By Article XII, Section 2 (b) (ii), only the Governors (not the Executive Directors) can approve a revision of quotas. By Article XVII (b) (ii), the provision in Article III, Section 2, that no change in a quota shall be made without the consent of the member concerned, can be revoked only with the consent of every member.

The only interpretation that the Board has found it necessary to give in connection with the foregoing provisions was the following, decided on July 20, 1950:

It is determined as a matter of interpretation that Article III, Section 4, and not Article III, Section 3, applies to all changes in quotas.1

The occasion for this interpretation arose when France received an increase in its quota before it had paid its subscription. Because of the low level of its reserves, its gold subscription was to be 10 per cent of its net official holdings of gold and dollars instead of 25 per cent of its quota. The question was whether this subscription would suffice for the enlarged quota, or whether 25 per cent of the increase would have to be paid in gold. The Board decided, in principle, that the latter was right; but as France had been given to understand the contrary, it accepted 10 per cent of France’s net official holdings of gold and dollars as sufficing for the whole gold subscription. (Subsequently France reduced the Fund’s holdings of its currency to 75 per cent of its quota, as has been done by most members that originally subscribed less than 25 per cent of their quotas in gold.)

Basis of quotas

The quotas negotiated at Bretton Woods and listed in Schedule A to the Articles of Agreement bore some relation to a formula devised by the U.S. Treasury, as follows:

  • 90 per cent of

    • 2 per cent of national income, 1940,

  • plus 5 per cent of gold and dollar balances on July 1, 1943,

  • plus 10 per cent of maximum variation of exports, 1934–38,

  • plus 10 per cent of average imports, 1934–38,

  • increased for each country in the same ratio as average exports, 1934–38, bore to national income.

The extent to which the quotas negotiated actually conformed to this formula has been discussed in Volume I.2 It is sufficient here to note that when considering quotas for new members in the early years of the Fund, the data yielded by this formula were used as a starting point for the discussion. Some anomalies produced by the formula were reviewed in 1962, and are considered below.

In accordance with Article III, Section 2, a general review of quotas took place in 1950, 1955, 1960, and 1965. Although there have been only two general revisions of quotas during the twenty years covered by this volume, and one of these did not coincide with the date for a general review, it will be convenient to divide our study of quotas into four parts corresponding to the periods between the general review dates.

Table 14 at the end of this chapter lists the quotas for all member countries as shown in Schedule A to the Articles of Agreement and as they stood at the end of 1950, 1955, 1960, and 1965.

Significance of quotas3

For the Fund as a whole, the size of quotas determines the volume of currencies and of gold which is available to it. Quotas have two other functions, both applying to individual members: they determine the member’s basic voting rights and they influence the amount that it can draw from the Fund.

A member’s basic votes comprise 250 votes plus one additional vote for each part of its quota equivalent to $100,000 (Article XII, Section 5(a)). For the purpose of voting under Article V, Sections 4 and 5, relating to the use of the Fund’s resources (waiver of conditions and declaration of ineligibility), these votes are increased by one for each $400,000 of net sales by the Fund of the member’s currency, or decreased by one for each $400,000 of its net purchases from the Fund, as the case may be (Article XII, Section 5(b)).4 Executive Directors cast the votes of the members that have appointed or elected them. They must cast these votes as a unit (Article XII, Section 3(i)). On most matters, a majority of votes is sufficient to carry a Board decision. In recent years votes have seldom been formally counted, except where required by the Articles in connection with changes in the scale of charges. Nevertheless, the voting power of Executive Directors still operates as the means by which a consensus is arrived at.

Table 10 shows the proportion of the total votes that could be cast, at five selected dates, by each Executive Director. The changes between the columns reflect principally the effects of (a) the quotas of countries joining the Fund, and (b) disproportionate changes in members’ quotas, particularly the special increases approved by the Governors in 1959 and the increases granted under the decision on the compensatory financing of export fluctuations.5 As new countries have joined the Fund the number of Executive Directors has increased, although not in proportion to the growth in total membership or total quotas. As a result of all the foregoing, the proportion of total votes which can be cast by the five appointed Executive Directors declined from 67.33 per cent in 1946 to 45.67 per cent in 1964.

Table 10.Voting Power of Executive Directors as Percentage of Total Votes, at Selected Election Dates
Executive DirectorsYears in Which Elections Held
19461950195619601964
Number of Executive Directors
1214161820
Appointed by:
United States33.5230.4626.6225.6322.63
United Kingdom16.0014.5412.7112.1810.77
China6.956.315.52
France5.736.045.285.024.43
India5.134.664.083.863.41
Germany5.024.43
Elected from:
(Article XII, Section 3(b) (iii))
Belgium3.754.844.464.033.58
Canada4.833.853.123.983.76
Czechoslovakia/Yugoslavia/Germany4.652.533.41
Netherlands5.134.123.983.573.78
United Arab Republic3.484.774.784.865.20
Australia3.843.723.954.35
Italy3.793.883.434.74
Denmark/Iceland/
Sweden3.663.543.13
Japan3.774.364.10
China3.553.14
Indonesia2.812.90
Senegal2.74
Uganda3.09
Elected from:
(Article XII, Section 3(b) (iv))
Brazil5.535.333.723.613.30
Mexico/El Salvador/Venezuela5.284.923.573.083.17
Argentina/Chile3.733.503.35
Total1100.00100.00100.00100.00100.00
Number of members38496068101
Total quotas ($ million)7,329.58,036.58,750.514,740.715,849.5

The stability of the Executive Board in terms of the nationality of the Directors is indicated in Table 10 and shown in more detail in Appendix A to Volume I. The latter also shows the stability of the groupings of countries electing Directors, which has been almost complete since 1954. The lack of change in these respects reflects the interweaving of four factors: (1) the relative sizes of members’ quotas; (2) the rules of election laid down in the Articles of Agreement (Schedule C), as modified from time to time by the Board of Governors; (3) economic, political, social, and cultural affinities; and (4) pre-election negotiation among members and Executive Directors, influenced by the relative voting powers of the members.

Two limits are imposed by Article V, Section 3(a) (iii), on the amounts that a member may draw from the Fund. Unless the Fund agrees to waive these limits, the member may not draw in any twelve months more than 25 per cent of its quota plus any amount needed to increase the Fund’s holdings of its currency to 75 per cent of its quota; and the Fund’s holdings may not exceed 200 per cent of the quota.

Quotas, 1946–50

Among the earliest tasks undertaken by the Executive Board when it began work in 1946 was to review the quotas of certain members that had protested at Bretton Woods that the amounts allotted to them were too small. One of these members was Paraguay, which had been allotted $2 million at Bretton Woods but sought a quota of $5 million. Its representative argued that the formula showed that $5 million would have been the correct figure, but the Board, viewing the formula as having no official standing, decided to increase Paraguay’s quota to $3.5 million only.

A request by France for an increase from $450 million to $675 million was also supported by a reference to the formula. This request, however, would have raised the French quota above that of China, whereas it had been understood between the U.S. and Chinese delegations at Bretton Woods that China should have the fourth largest quota (after the United States, the United Kingdom, and the U.S.S.R.). China therefore made a counter-request for an increase in quota from $550 million to $715 million. The Governors decided to increase the French quota only to $525 million,6 and China then withdrew its request.

Australia, which had been allotted a quota of $200 million at Bretton Woods, delayed its application for membership until 1947. When this came before the Board, Mr. Saad (Egypt) pointed out that the formula would have yielded a quota for Australia of $134 million only. He was reminded that the formula had no binding force, and that Australia’s quota had been settled at the same time as those of the other original members. He suggested, however, that if Australia was to receive a quota so appreciably larger than that yielded by the formula, Egypt and Iran, which had protested at Bretton Woods against the amounts allotted to them, should also be given larger quotas. The Executive Directors therefore considered the cases of these two members, and recommended to the Governors that their quotas should be revised. The Governors agreed, and accordingly the quota for Egypt was increased from $45 million to $60 million and that of Iran from $25 million to $35 million.7

There were no further increases in quotas during the years 1946 through 1950. However, on the partition of India in 1947 the quota for India was maintained unaltered, thus affording the member, in effect, an increase in quota per capita;8 India had protested at Bretton Woods that its quota was too small. Honduras, because of a difficulty in providing its gold subscription, asked that its quota should be reduced from $2.5 million to $0.5 million. The Governors agreed.9

Rule D-3 requires the Board, at least one year before the time when a quinquennial review of quotas is due, to appoint a committee to study what should be done and prepare a written report. Accordingly, in December 1949 the Board agreed, on the proposal of the Managing Director, to set up a Committee of the Whole on Review of Quotas. A staff committee, appointed to advise the Committee of the Whole, recommended that quotas should be doubled to correspond to the general economic growth since the dates on which the formula was based. However, the Managing Director suggested to the Board that, in view of the uncertain conditions prevailing in the world late in 1950, the time was inopportune to make any change. The Committee of the Whole agreed with the Managing Director, and the Board formally closed the general review in March 1951 with a decision that no increase should be proposed at that time.

The total of quotas, which in Schedule A was $7,600 million (excluding the U.S.S.R.), had risen by the end of 1950 to $8,036.5 million, principally because of the addition of nine new members, offset by one (Poland) that left the Fund.

Proposals to entrust the Fund with additional resources were made by a group of experts appointed by the United Nations in 1949 to recommend national and international measures to achieve full employment. The inflationary dangers inherent in their proposals, however, caused these to be disregarded.

Quotas, 1951–55

A second group of experts, asked by the United Nations to propose measures to achieve international economic stability, including the reduction of fluctuations in primary product markets, reported late in 1951.10 The report included a number of proposals affecting the Fund, including a recommendation that its resources should be increased to the point at which it could meet its share of a decline in the supply of dollars which might amount to $10 billion over two years. The Board considered this report in April 1952, and decided that the Fund’s representatives to the meeting of ECOSOC at which the report was to be presented should make two points that concern the subject of this chapter. One was that the Fund regarded it as its function to make its resources available, to make known that they were available, and to provide a forum for the discussion of economic problems. A second point was that the Fund’s resources were limited, and although there had for some time been discussions of the possibility of increases in quotas, these seemed likely to be frustrated by members’ inability to find the necessary 25 per cent of any increase in gold.

Toward the end of 1952 the Board discussed a request from Ethiopia for an increase in its quota (which was not, however, proceeded with). At the request of Directors, the staff then prepared a general study of the adequacy of quotas. Because it was less than two years since the Board had decided that no general increase was needed, the staff concentrated on a possible need for relative increases. In a report to the Board in January 1953 the staff pointed out that, while the value of world trade in general had increased by approximately three times since 1937–38, there were eleven members whose trade had increased by more than four times in the interval. The staff also pointed to three members whose quotas as fixed at Bretton Woods appeared to be badly out of line with the formula. To amend these discrepancies an increase in aggregate quotas of some $250 million would be needed. The Managing Director commented, however, that it appeared from the staff’s inquiries that the quota structure as a whole was not badly distorted, and for this reason, and because quotas could not be fixed on statistical grounds alone, he proposed that no action should be taken. The Board tacitly agreed.

The Fund’s views were noted at the meeting of ECOSOC at which the report on measures for international economic stability was considered, and the Fund was invited to keep under review the adequacy of monetary reserves and to furnish a report on the subject for the meeting of ECOSOC in 1953.11 In response to this invitation the staff prepared in April 1953 a draft study which, after discussion in the Board and some consequential revision, was forwarded to ECOSOC in June 1953.12 Its conclusions were presented in the form of four alternative definitions of “adequacy,” coupled with the statement that while many countries would have adequate reserves on the least exacting definition, only a few would do so if reserves were to be expected to maintain currency stability without restrictions even in a severe depression—falling short, however, of the severity of the 1930’s.

Thereafter the staff continued to study the subject, with particular reference to a possible need to expand the Fund’s resources in order to enable it adequately to supplement members’ owned reserves.

In December 1954 the Board set up a Committee of the Whole to undertake the Second Quinquennial Review of quotas, due in 1955. It became clear at an early meeting of the committee that some of the primary producing countries, especially in Latin America, were seeking increases in their quotas. Mr. Southard (United States), however, suggested that no over-all increase in quotas was justified because the Fund’s resources were already large and had remained relatively unused. He and Lord Harcourt (United Kingdom) announced that their Governments were unwilling to increase their quotas. As this meant that the necessary 80 per cent majority for an increase in quotas would not be forthcoming, the Board decided instead to invite individual member countries to approach it if they wished their quotas increased.

Meanwhile several attempts were made to evolve a formula which would permit members with the smallest quotas to increase them, although any such formula was opposed by some Directors as tending to impair the liquidity of the Fund by increasing only its supply of currencies not likely to be needed for drawings. The Committee of the Whole was reluctant, in any case, to suggest an increase in any quota that already exceeded $20 million, and as it turned out a number of Latin American countries seeking increases had quotas in that category. Taking everything into account, the committee recommended in January 1956 that there should be no general increase in quotas, but that the Board should look with favor upon requests by members with small quotas to increase them. The Board accepted this recommendation, thereby ending the Second Quinquennial Review. Within the five years 1951–55 only one increase in quota was granted, Honduras being permitted to restore its quota from an initial figure of $0.5 million to the $2.5 million agreed at Bretton Woods.

During the five years 1951–55 the aggregate of quotas increased by $714 million as the result of the addition of ten new members, offset by the departure of Czechoslovakia.

Quotas, 1956–60

In contrast to the preceding five years, the quinquennium 1956–60 saw major changes in quotas. During 1956 and 1957 a number of increases were granted, following the recommendation of the Committee of the Whole in January 1956. These were based on a scale which was worked out in the course of informal discussions among Executive Directors and was officially known as the “Small Quotas Policy.” It provided that quotas below $5 million could be increased, on request, to $7.5 million, those of $5–8 million to $10 million, those of $10 million to $15 million, and those of $15 million to $20 million.

First signs of pressure on the Fund’s resources also developed in 1957. The Managing Director and some Governors at the Annual Meeting, 1957, pointed out that almost all drawings during the year had necessitated waivers of the quantitative limits set by Article V, Section 3(a) (iii), and suggested that this implied that quotas were too small.13 Pursuing this point, the staff provided the management in April 1958 with an interim report on a possible need to increase quotas. This argued that the recession in the United States, and the related decline in raw material prices, were likely to induce primary producing countries to seek drawings from the Fund on a scale which it might be difficult for the Fund to meet. After further review, the staff produced in August 1958 a report entitled International Reserves and Liquidity, which concluded that it was doubtful whether the Fund’s resources were adequate fully to perform its duties under the Articles in the conditions likely to be met in coming months.14

Meanwhile a decision was reached in the U.S. Government on the basis of which the President instructed the U.S. Governor to propose, at the forthcoming Annual Meeting in New Delhi, that prompt consideration should be given to a general increase in quotas. A resolution to that effect was adopted on October 7,15 and on the Board’s return to Washington from New Delhi consideration was given to it.

The outcome of the Board’s deliberations was a report to the Governors entitled Enlargement of Fund Resources Through Increases in Quotas, which was printed and distributed at the end of December 1958. In this, the Directors announced their conclusion that an increase in quotas was highly desirable, and suggested that an increase by 50 per cent was a reasonable basis for a general increase.16 At the same time, the Board proposed that special increases should be given to Canada, Germany, and Japan, and to members with particularly small quotas. The report concluded with three draft resolutions, the first providing for a general increase of 50 per cent in quotas, the second for increasing the quotas of twenty-four members to which the Small Quotas Policy applied to levels 50 per cent above those provided by that formula, and the third for special increases for Canada, Germany, and Japan. At the time that this report was completed the Board had not finished reviewing the requests for special increases submitted by some other members, and in February 1959 the Governors were invited to consider a fourth resolution providing for such increases for fourteen members other than those covered by the second and third resolutions.

The justification for these special increases rested on two alternative arguments. Some members sought such increases because at Bretton Woods they had been offered smaller quotas than they wished for, or quotas not in line with the formula, or quotas based on incomplete or inaccurate data. Other members requested increases because their economies had grown appreciably faster than the general run in the postwar period.

The difficulty expected to be experienced by some members in finding gold to pay for 25 per cent of the increase in their quotas, mentioned to ECOSOC in 1952, was met by the offer of two concessions. Members in that position were to be allowed to increase their quotas by installments over five years, paying in gold 25 per cent of each installment annually; or, if they preferred, they might provide the gold subscription by making a special drawing, which would have to be repurchased in three annual installments. These arrangements applied only to the general increase in quotas; members having special increases were expected to pay 25 per cent of their increases in gold.

All four resolutions were adopted by the Governors, the first three on February 2, 1959 and the fourth on April 6.17 The new quotas became operative on September 9, when members aggregating more than 75 per cent of total quotas had accepted their increases.

During 1960 special increases were approved for four other countries, Australia, Chile, Colombia, and Yugoslavia.18

A Committee of the Whole appointed by the Board in December 1959, in preparation for the quinquennial review of quotas due in 1960, recommended that no further increases were necessary. The Board agreed on December 16, 1960.

As a result of the foregoing changes, and of the addition of eleven new members, the total of quotas at the end of 1960 was $14,740.7 million, an increase of almost $6 billion compared with five years earlier.

Quotas, 1961–65

During the Fund’s fourth quinquennium, as during the preceding one, much attention was focused on small quotas. The period ended with a recommendation for a second general increase in quotas, together with a further group of special increases, all of which took effect after 1965.

Apart from one or two belated increases stemming from the general review described in the previous section, the first occasion when the Board’s attention was directed to quotas during the period 1961–65 was in April 1962, when the United Arab Republic sought an increase from $90 million to $120 million. Among the reasons which the member cited for the increase was the instability of its export receipts, and the same reason was given three months later when the Syrian Arab Republic asked for an increase from $15 million to $25 million. The United Arab Republic’s request was approved by the Board and in due course by the Governors.19 When that of the Syrian Arab Republic was discussed by the Board, Mr. Southard said that he understood that many countries in the same quota range desired increases in their quotas, and the increase sought therefore raised very broad questions. Shortly afterward, El Salvador asked for its quota to be increased from $11.25 million to $15 million.

During the Annual Meeting, 1962, the Managing Director discussed the problem of small quotas with a number of Governors, and subsequently reported to the Board that he believed that increases in such quotas might be a useful way in which the Fund could assist the members concerned. The staff was asked to prepare a study suggesting the lines along which the Board might proceed.

In the meantime the Board had before it an invitation from the UN Commission on International Commodity Trade to consider whether the Fund could play a larger part in providing compensatory financing for export fluctuations, and if so in what way. By the time that the staff study just mentioned was ready, the Board was engaged in considering its reply to the UN Commission, and the two subjects thereafter were dealt with together.

The staff analysis divided members into four groups, (1) those having quotas of $30 million and under, (2) those having quotas between $31 million and $60 million, (3) the ten industrial countries, and (4) the remainder (excluding China). Comparisons of existing quotas with the Bretton Woods formula applied to 1955–59 data, with average exports for 1955–59, and with the variation of exports from trend in 1950–61, showed that the quotas of the second group of countries compared unfavorably with those of the countries in the other three groups. Using the comparison with variation of exports from trend, the under $30 million group also appeared to have quotas that were too small in relation to the ten industrial countries and the remainder. Fresh calculations, made a little later with more up-to-date data, confirmed these results.

The staff then undertook extensive research into possible variations in the formula underlying quotas, in the hope of discovering a version of it which would avoid certain unsatisfactory features. A first report pointed out that the inclusion of the ratio between exports and national income in the formula had the effect, if quotas were plotted on a graph measuring quotas vertically and national income horizontally, of producing a U-shaped curve instead of one that rose consistently from left to right. The staff also commented that if the weights allotted to national income and to reserves in the formula were lessened, the quotas for small countries would be increased relative to those of large countries. The Board considered with interest these results of the staff’s work, but was unwilling to accept any alternative formula, preferring to continue to regard the original one as a point of reference when the calculation of quotas was being undertaken.

It may be noted here that a substantial departure from the formula as applied to small countries followed from the resolutions taken in 1959 and reported above. The combined effect of the Small Quotas Policy and the 50 per cent general increase in quotas in 1959 was to raise the minimum quota to $11.25 million. This, however, was greatly in excess of the figure reached by applying the Bretton Woods formula to data for a large number of the newly established African countries which joined the Fund in 1963. It was accordingly suggested to some of these countries that they might prefer to accept a quota of $7.5 million, and nine of them did so, as Laos and Nepal had done in 1961.

Meanwhile the Fund’s reply in February 1963 to the inquiry from the UN Commission included a statement that consideration would be given to increases in quotas if members felt that their existing quotas were inadequate to enable them to deal with fluctuations in export proceeds, or in their balances of payments generally.20

Any increases in quotas, and particularly those of small countries, were likely to raise again the question whether the members concerned were able to contribute 25 per cent of the increases in gold. The Board accordingly offered again the options of increasing the quotas by installments over five years or of taking special drawings from which to provide the needed gold.21 It considered, but rejected, a suggestion by the staff that the Fund might also be prepared to reduce the proportion of increases required to be provided in gold, as contemplated by Article III, Section 4(a).

The increase requested by the Syrian Arab Republic, that by El Salvador (which had since been revised upward to $20 million), and one asked for by Honduras (from $11.25 million to $15 million) were recommended to the Governors under the terms of the compensatory financing facility, and were approved.22 Six similar increases were approved in 1964, and a further five in the first two months of 1965.23

Apart from these increases under the compensatory financing facility, the quotas of four countries were enlarged in the latter part of 1963 and the early part of 1964—those of Israel ($25 million to $50 million), Italy ($270 million to $500 million), Malaysia ($37.5 million to $100 million), and Panama ($0.5 million to $11.25 million).24

In March 1964, as part of its study of the problems of international liquidity, the staff prepared a study of quotas which suggested that substantially larger ones would be appropriate in 1964–65. An increase of the general order of 50 per cent was suggested, together with special increases larger than this for certain members in order to reduce disparities between the existing quotas. This recommendation was discussed by the Board in April, and again in connection with the drafting of the Annual Report in June. In the Annual Report the Directors commented that increases in quotas were the normal way to expand the operations of the Fund, and suggested that it would be advantageous to consider quotas as promptly as possible after the Annual Meeting.25

Once more the problem of the payment in gold for 25 per cent of any increase came to the fore. On this occasion the Annual Report distinguished two types of difficulty.26 One, which had previously been provided for, was that some members’ reserves of gold and foreign exchange were too low for them to be able to afford the gold payment. The other, which was considered for the first time, was that other members having reserves of convertible currencies but not gold would be apt to request the issuers of these currencies (mainly the United States and the United Kingdom) to convert appropriate amounts into gold for use in providing the necessary 25 per cent of quota increases. While gold found from a member’s own reserves entailed only an exchange of one type of reserve for another (an improved position in the Fund), gold provided by the issuers of reserve currencies in exchange for their currencies would adversely affect their reserve positions.

On the invitation of the Executive Board, the Governors passed a resolution instructing the Executive Directors to consider adjusting members’ quotas and to submit an appropriate proposal to the Board of Governors at an early date.27 Pursuant to this resolution there was prolonged consideration in the Executive Board28 which culminated in a recommendation for a general increase of 25 per cent all round, together with special increases for sixteen countries whose quotas were disproportionately small.29 Provision was made for the increases in quotas to be taken in installments, and for special drawings, as on previous occasions. In addition the Board, after much debate, proposed two procedures to mitigate the drain on those members whose currencies were converted to provide gold. One was that certain of the special drawings, up to the equivalent of $150 million, would be directed by the Fund to specific members’ currencies; the Fund would then replenish its holdings of these currencies by the sale of gold to the members concerned. The second was that the Fund would make general deposits of gold with the United States (maximum $250 million) and the United Kingdom (maximum $100 million) in respect of gold sold by those countries. The deposits would be demand deposits, and the Fund would propose to draw on them and on earmarked gold, in appropriate proportions, when it had need of gold.

Resolutions embodying the Directors’ proposals were submitted to the Governors for a vote without meeting and by April 1, 1965 had been approved by the necessary 80 per cent of votes.30 However, the acceptance of individual increases, which in many countries required legislative action, was protracted, and it was not until February 23, 1966 that the Directors were able to decide that members holding two thirds of the total votes had notified their acceptance, this being the minimum stipulated in the resolutions to bring the increases into effect. Shortly afterwards the Fourth Quinquennial Review was formally terminated.

The concessions offered in connection with the 25 per cent gold subscription were utilized by forty-two members; of these, twenty-three took special drawings totaling $246 million and nineteen opted for increases by installments. Gold deposits of $289.1 million were made, of which $244.7 million were in the United States and the remainder in the United Kingdom. Gold to the value of $148 million was used to replenish currencies. Four members declined the offered increases, and three others had not decided whether to accept at the expiration of the period allowed for the purpose.

Seven members that applied for increases under the compensatory financing facility after the Directors’ recommendations had been submitted to the Governors were permitted to superimpose the general increase upon the special increases which they sought.31

As a result of the influx of new members and of the various special increases (including compensatory financing increases) mentioned above, the aggregate of quotas rose between 1961 and the end of 1965 to $15,976.6 million, an increase of $1,236 million. But the effect of the general increase was felt progressively after 1965. By the end of 1968 the total had risen to $21,198.4 million; and it continues to rise as the quotas being increased by installments progressively attain higher levels.

INCOME AND EXPENDITURE

The Fund’s income is mostly derived from charges, and is therefore closely related to the volume of transactions. It will be convenient to summarize the figures (set out in Table 11) by the same five-year periods as were used in the previous section.

During the first five years of the Fund’s life drawings were small, except in 1947. Correspondingly, the addition to its resources arising from charges was also small. For the five financial years 1946/47 through 1950/51 the Fund’s income totaled $11.4 million, of which $9.3 million was paid in gold and the remainder in drawing members’ currencies. As total expenditure in the five years was over $17 million, the Fund’s resources were reduced, on income and expenditure account, by some $5.7 million.

Table 11.International Monetary Fund: Income, Expenditure, and Reserves, Fiscal Years 1947–66(In millions of U.S. dollars)
Fiscal Year1Income Excluding InvestmentsInvestment IncomeAccumulated Deficit (-) or General ReserveAccumulated Total of Special Reserve
Charges on Drawings
Other2TotalExpenditureApplied to DeficitTo Special Reserve
Paid in goldPaid in currencies
1946/470.470.472.173-1.70
1947/484.160.034.192.63-0.15
1948/491.380.410.011.803.81-2.16
1949/501.590.720.012.323.97-3.81
1950/511.760.900.012.684.60-5.72
1951/522.520.710.023.254.77-7.24
1952/532.960.920.284.164.89-7.96
1953/544.410.510.074.995.01-7.99
1954/552.160.130.062.474.99-10.51
1955/561.300.020.231.535.350.12-14.21
1956/574.633.570.198.405.384.90-6.30
1957/5813.475.501.2920.3011.3443.332.835.992.83
1958/5920.574.552.0527.176.684.1125.586.94
1959/6012.575.163.2721.006.8815.3639.7622.30
1960/6110.723.180.6514.557.3619.8746.9942.16
1961/6220.5911.980.5433.118.1622.7871.8164.94
1962/6322.724.663.6631.049.5725.0993.2990.04
1963/6427.956.681.7236.3513.12527.49116.52117.52
1964/6527.3618.032.3647.7522.20630.75141.81148.27
1965/6627.6552.181.4981.3236.77733.91186.36182.18
Totals8210.94119.8417.91348.85169.658.35182.19

During the five financial years 1951/52 through 1955/56, income totaled $16.4 million and expenditure amounted to $25 million. By the end of the Fund’s first ten years, therefore, there had been a net loss of resources on income and expenditure account of $14.2 million.

The year 1956 was, however, the turning point. Since then much greater drawings have produced a large increase in the Fund’s income. During the five financial years 1956/57 through 1960/61 charges totaled almost $84 million, of which three fourths was paid in gold. Total income apart from that derived from investments was over $91 million, and as expenditure was only $37.3 million a substantial increment to the Fund’s resources resulted. During the same period the income from the Fund’s investments (see the immediately following section) totaled $50.5 million.

During the five financial years 1961/62 through 1965/66, the Fund’s income rose steeply to a total of $229.6 million, exclusive of $140 million from investments. Charges totaled $220 million, of which $126 million was paid in gold. Expenditure was $88 million. At the end of the five years the General Reserve amounted to $186.4 million and the Special Reserve (resulting from investment income) to $182.2 million.

INVESTMENT OF THE FUND’S ASSETS

Provisions of the Articles

Article XII, Section 2 (g), provides that

The Board of Governors, and the Executive Directors to the extent authorized, may adopt such rules and regulations as may be necessary or appropriate to conduct the business of the Fund.

This has been held to recognize the principle of implied powers, by virtue of which the Executive Board may perform any act that it judges to be necessary or appropriate to the proper administration of the Fund’s assets, unless a specific provision of the Articles prohibits it.

Article IX, Section 2, states in part that “the Fund shall possess … the capacity … to acquire and dispose of immovable and movable property,” and Article IV, Section 8(a), provides that “the gold value of the Fund’s assets shall be maintained notwithstanding changes in the par or foreign exchange value of the currency of any member.” It should be noted that the latter provision covers not only the Fund’s holdings of currencies but all its assets.

A limit to the Fund’s operations is set by Article V, Section 2, which reads:

Except as otherwise provided in this Agreement, operations on the account of the Fund shall be limited to transactions for the purpose of supplying a member, on the initiative of such member, with the currency of another member in exchange for gold or for the currency of the member desiring to make the purchase.

This has been held to limit operations to those specifically provided for in the Articles, but not to prohibit transactions of an administrative character.

Early proposals

In October 1946 Mr. White (United States) sent to the Board a memorandum stating that he had asked the Legal Department to investigate whether the Articles would prohibit investment by the Fund in U.S. Government securities. The Legal Department’s reply to this inquiry contained the explanation of Article XII, Section 2 (g), and of Article V, Section 2, and drew attention to the significance of Article IX, Section 2, and Article IV, Section 8(a). It suggested that in the light of these provisions the Executive Directors were entitled to invest the Fund’s assets and to use the income from the investment for administrative purposes. However, a prior understanding with the United States concerning the application of Article IV, Section 8(a), would be advisable. If possible, any arrangements for an investment should include a guarantee of conversion into gold at the price received by the Fund for its gold.

Mr. White’s proposal, and the Legal Department’s comments, were considered by the Board in November 1946. Directors accepted the legal arguments that an investment in short-term U.S. Government securities, such as Mr. White proposed, could be made by the Fund, and agreed that it could be so arranged as to be practically riskless. Some Directors, however, deprecated an investment on the grounds that it might be misunderstood and even impair confidence in the Fund. The Board accordingly decided not to take any decision at that time.

During the discussion the Research Department was asked to review the possible effects on the U.S. money market of the suggested investment. In a memorandum distributed shortly afterward, the Department replied that an investment of a substantial size, and its subsequent liquidation, would have important effects on money and credit in the United States—which effects could, however, be offset by the Federal Reserve System.

Four years later Mr. Overby, Deputy Managing Director, asked the Legal Department for an opinion on the legality of investing in U.S. Government securities (a) part of the Fund’s gold holdings and (b) part of the dollar subscription of the United States. The Legal Department’s reply was confined to the question of investing gold. After confirming the opinion that it had expressed in reply to Mr. White, the Legal Department proposed three safeguards to which any investment should conform:

(i) The amount of the investment should be reasonably proportioned to the expenditures for which income was intended to be produced;

(ii) the amount and duration of the investment should be such as not to hamper sales of currencies by the Fund to its members; and

(iii) risks of loss should be avoided by a U.S. guarantee that the Fund could reacquire at any time the same amount of gold, and by an interpretation of the Articles that would establish the responsibility of the United States to maintain the gold value of the investment should the par value of the dollar be changed.

In April 1951 the Board again considered the question of investment, and this time appointed an Ad Hoc Committee consisting of Mr. Martínez-Ostos (Mexico), chairman, Mr. Beyen (Netherlands), Sir George Bolton (United Kingdom), Mr. Melville (Australia), and Mr. Southard to investigate the possibilities of investing some of the Fund’s assets in order to yield an income to offset the operating deficit. This committee met for the first time in May 1951. Mr. Southard then said that he could not state the U.S. Government’s position on either the legal or the policy issues involved, since the U.S. legal advisors were still reviewing the matter. For himself, while he agreed with the staff that legally the Fund could make such an investment, he had doubts about the wisdom of doing so. He also doubted whether the U.S. Government would be willing to give a repurchase guarantee, or would accept that it was obliged to maintain the gold value of the investment. Other members of the committee also expressed doubts on both the legal and the policy issues.

The committee did not meet again until July 1952. The chairman then reported that the U.S. Government had still not reached any definite decisions. He had examined the possibility that the Fund might purchase government bonds from some members’ central banks, with a guarantee of the convertibility of the earnings, but the interest shown earlier by some Latin American banks in such a proposal had waned. He had also looked into a suggestion that the Fund might acquire World Bank bonds, but discussions with the World Bank had shown that this would not be feasible. In view of these negative results, and of the continuing differences of view among Directors, the committee recommended to the Board that no action be taken and that it be discharged; this was done in August 1952.

First investment

In April 1955 Mr. Southard suggested that, in view of the Fund’s growing deficit, further consideration should be given to investing part of its gold. When this was discussed at three meetings in May, the legality of an investment was debated but no decision was reached. Mr. Southard indicated that the U.S. Government was willing to accept $200 million of the Fund’s gold for investment in U.S. securities, but while Lord Harcourt expressed appreciation of this offer and said that in the British view the Fund could legally make such an investment, he reported that the British Government doubted the wisdom of making one: the Fund’s prestige might be damaged, and its influence impaired, if the impression was given that it was not functioning as had been intended. Other Directors, including Mr. Crena de Iongh (Netherlands), Mr. van Campenhout (Belgium), and Mr. de Largentaye (France), also opposed an investment, citing both legal and policy objections. However, at a fourth meeting, in July, some change of view appeared. Mr. Southard and Mr. Rasminsky (Canada) urged that a favorable decision should be taken because it was vital that the Fund should not continue to run a deficit. Lord Harcourt agreed to take the matter up again with his authorities.

One of the reasons urged at these meetings against making an investment was that there was a possibility that in the near future convertibility of some of the major non-dollar currencies would be restored, which might alter the Fund’s situation in an unforeseeable way. This reason was undermined at the Annual Meeting, 1955, when the Governor for the United Kingdom announced that for the time being sterling would not be made convertible. After the Meeting, Lord Harcourt informed the Managing Director that the United Kingdom was now willing to agree to the Fund’s investing part of its gold on the conditions that (1) the amount and terms of the investment must be such as not significantly to impair the Fund’s liquidity; (2) the U.S. Treasury must recognize the Fund’s right to repurchase the gold; (3) the Fund must not bear an exchange risk on the dollars that it acquired; and (4) the amount to be invested should be subject to review by the Board from time to time. Some two months later, in December 1955, Mr. Southard notified the Board that he was now in a position to return to the question of investment, and Lord Harcourt then repeated these conditions to the Board.

Three further meetings were needed before Executive Directors were satisfied that the proposal should be implemented. Mr. de Largentaye still contended that the investment was ultra vires because of Article V, Section 2, but he was alone in dissenting from the eventual decision, which set out the purposes and the rationale of the investment in the following terms:

The Executive Board, observing that the Fund has had and may continue to have an excess of expenditure over income and that the greater part of the Fund’s administrative expenditures has been and will continue to be in United States dollars, considers that in the interest of good administration and conservation of the Fund’s resources it would be appropriate to raise income towards meeting the deficit by the investment of a portion of the Fund’s gold… .32

The decision also noted the willingness of the United States to consent to the investment, and embodied two interpretations under Article XVIII (a) of the Articles of Agreement. The first of these specified the conditions under which the sale of gold for investment would be legal:

(1) The amount of gold to be sold for investment:

(a) will not be such as to limit the ability of the Fund to make its resources available to members in accordance with the Articles of Agreement; and

(b) will be such as to produce an amount of income reasonably related to the deficit of the Fund;

(2) Whenever the Fund decides to reacquire gold after the sale or maturity of any United States Treasury bills invested in, it will be able to reacquire the same amount of gold as was sold for investment in such bills; and the United States, at the request of the Fund, will sell the said amount of gold to the Fund for U.S. dollars at the United States selling price at the time of the sale to the Fund;

(3) In any computations for the purpose of applying the provisions of the Articles of Agreement the Fund will treat the following assets as representing gold and not as holdings of United States currency;

(a) the dollar proceeds of the sale of gold before investment in the United States Treasury bills; and

(b) the United States Treasury bills invested in; and

(c) the dollar proceeds resulting from the sale or maturity of any such bills before the purchase of gold therewith.33

The second interpretation was to the effect that Article IV, Section 8(a), required the United States to maintain the gold value of the assets mentioned in paragraph (3) above, notwithstanding changes in the par or foreign exchange value of the U.S. dollar. It continued:

This obligation of the United States shall be fully discharged by its maintaining the gold value of the dollar proceeds resulting from the sale of the gold or from the sale or maturity of the U.S. Treasury bills purchased therewith.

Mr. Southard had indicated earlier that the U.S. Secretary of the Treasury was prepared to give the assurances required by this interpretation, and also to recommend to the President a waiver of the customary ¼ of 1 per cent handling charge on the sale and ultimate repurchase of gold. Both of these arrangements were carried through.

When it became evident in December 1955 that the Board would probably approve the investment, the staff began to make arrangements for the gold to be sold and the resulting investment to be made through the Federal Reserve Bank of New York. The latter approached the transaction with some reluctance. Its President, Mr. Allan Sproul, looked on it unfavorably, believing that the investment would be more severely criticized in Congress than the Fund’s deficit had been. The Federal Reserve Bank’s advisors were also apprehensive that the Bank might be subjected to lawsuits on the ground that the investment was illegal. Although the advisors of the Fund and of the U.S. Treasury held that the legality of the transaction was fully established, the Fund’s letter to the Federal Reserve Bank of New York instructing it to carry out the operation—the terms of which were agreed with the Bank—stated that the Fund would indemnify the Bank for any claims, losses, damages, or charges that it might incur or for which it might become liable in connection with the operation.

The Federal Reserve Bank’s letter to the Fund included the following paragraph, accepted by the Fund in recognition of the Federal Reserve System’s responsibilities in the monetary field:

We hold to the principle that in this market operations of foreign central banks and international organizations should conform in a general way to the monetary and credit policy of the Federal Reserve System, as otherwise it might be necessary for us at times to magnify our own operations in order to offset those here of such banks and organizations. Accordingly, we are sure that you will understand that, if at any time in the future the investment of your dollar balances should run counter to the Federal Reserve System policy, we would wish to feel free to advise you to that effect and, if we deem it necessary, to request that you allow your investments to run off at maturity.

To comply with the Federal Reserve Bank’s wishes, the investment of the Fund’s gold was made gradually, being completed in October 1956.

Change of purpose

A sharp increase in drawings during the winter of 1956–57 produced a steep rise in the Fund’s income, and by the middle of August 1957 it became clear to the staff that the Fund’s accumulated deficit was likely to be eliminated by the time of the Annual Meeting. As the decision taken in 1956 restricted the investment to the purpose of dealing with the accumulated and current deficit, the Acting Managing Director, Mr. Cochran, decided that the cost of the new Fund building, then under construction, should be charged to income instead of to a special account as had been done previously. This delayed the elimination of the deficit on income account until November 1957.

After the Annual Meeting, 1957, the Managing Director submitted to the Board a proposal that the investment should be continued to provide a reserve against possible future deficits. He pointed out that there could be no guarantee that drawings would continue at the level they had reached, so that the Fund’s future income could not be relied upon to cover expenditure. He recommended that the purpose of the investment be altered from “to raise income towards meeting the deficit” to “to raise income and provide a reserve towards meeting possible future deficits.” The income from the investment should be placed in a special reserve. It was unnecessary to set a limit to the size of the reserve.

This proposal was discussed by the Board at the end of November 1957 and approved, Mr. de Largentaye being the only dissentient. Mr. Southard expressed the view that a reserve of at least $100 million would be sensible, and that the program should be reviewed annually. Following this decision, the Special Reserve was set up (see Table 11).

Other possible purposes for an investment were discussed in a memorandum prepared by the Director of Research and the Deputy General Counsel in February 1959 which suggested that the Fund should embark upon a long-term policy of investing a substantial amount of the Fund’s gold, not limited to U.S. securities. The memorandum pointed out that the Fund’s gold holdings would increase substantially as a result of the general quota increase just then approved by the Governors, and suggested that the disadvantages of the resulting decrease in members’ owned reserves could be counteracted if the Fund were able to channel back some of the gold to them by means of an investment. However, the memorandum recognized that an investment for this purpose would be ultra vires, because of the prohibition in Article V, Section 2.

One particular aspect of members’ loss of gold was the subject of a further memorandum in June 1959. In this, the Deputy General Counsel pointed out that the gold holdings of the United States had been declining sharply, and he observed that if the Fund were to make a further investment of gold in U.S. securities—perhaps increasing the existing $200 million to $500 million—this would ease for the United States the payment of $343.75 million in gold due in connection with the increase in the U.S. quota.

Increase in amount and maturity

In July 1959 the Managing Director proposed to the Board that the amount of gold invested should be increased from $200 million to $500 million, and that part of the larger sum should be invested in securities having a term to maturity of more than three months but not more than twelve months. He pointed out that the effect of the increases in quotas then being implemented would be to reduce the Fund’s income (1) by relating existing drawings to lower tranches of the quotas and (2) in particular, by shifting some drawings into the gold tranche, thereby ending charges on that drawing. Such changes were expected to lower income by $10 million a year. Income might also be expected to decline as the large drawings then outstanding were repurchased. The result would be a decline in the rate of growth of the General Reserve, to which the operating surplus was carried. This Reserve totaled about $26 million at that time. In relation to the Fund’s capital, increased by the changes in quotas to about $15 billion, total reserves (General and Special together) of $100–200 million would not be excessive. In these circumstances an increase in the rate of growth of the Special Reserve was desirable. At that time the Special Reserve totaled about $8 million and was increasing at a rate of $4–6 million a year, depending on the rate of interest earned. Under the new proposal it would increase by $10–15 million a year. This figure resulted partly from the larger amount of the investment and partly from the higher rate of interest which would be obtainable on securities with a longer term than three months; recourse to the latter would require an amendment to the interpretation of the Articles set out in the first decision on investment, and a draft decision provided to the Board embodied this.

When this proposal came before the Board, Mr. Southard said that the U.S. Government was willing to extend its guarantee of the gold value of the investment to cover the enlarged sum. Mr. Rasminsky stressed the desirability of cooperation with the U.S. monetary authorities, and commented that since the investment was useful to the Fund, advantage should be taken of the authorities’ willingness so long as this continued. Mr. Feuché (France) again stated the French objections, explained on previous occasions by Mr. de Largentaye. Messrs. Lieftinck (Netherlands) and Toussaint (Belgium), while not objecting to the proposal, expressed concern at the proposed size of the reserves in relation to the Fund’s prospective expenditure, and also questioned the wisdom of increasing the investment in a period of boom. The investment was, however, approved.

Second increase in amount

In November 1960 the Managing Director proposed to the Board that the amount invested should be further increased, from $500 million to $800 million. His reasons were that the continuous growth in the number of Fund members was necessarily expanding the Fund’s expenditure, while its operating income had been declining. Further, the rate of interest earned on the investment was appreciably less than it had been at the time of the increase from $200 million to $500 million. The increase in the Special Reserve (then about $32 million) which would result from a larger investment would give greater assurance that the whole of the General Reserve (then about $43 million) would be available for purposes other than financing administrative deficits.

Mr. Southard told the Board that the U.S. authorities would agree to the proposed increase in the investment, and would give the necessary guarantee. While the continued decline in the U.S. gold reserves (from $20.58 billion at the end of 1958 to $18.44 billion in October 1960) was not mentioned in the discussion, it may be assumed that this played a part in influencing the U.S. Government’s decision.

The Board accepted the Managing Director’s proposal. On this occasion Mr. de Largentaye agreed with the decision, on the footing that the Board’s interpretations had made the investment legal. Mr. Reid (Canada) suggested that it might be desirable to give some consideration in the future to permitting investment in longer-term (say 3-year) securities. The Managing Director undertook that the suggestion would be borne in mind, and that if such an investment seemed desirable a recommendation would be made to the Board. However, no general recommendation has been made, and the only securities for longer than 12 months that have been held by the Fund have been U.S. Treasury notes in which investments of about $62 million were twice authorized, in July and November 1961. Both investments were suggested by the U.S. authorities, the first in 15½-month notes to facilitate a Treasury refinancing operation, and the second in 15-month notes because no 12-month securities were being issued at a time when the Fund had $62 million of 12-month securities coming to maturity.

BORROWING BY THE FUND

The powers of the Fund to borrow currencies that it needs for its operations are contained in Article VII, Section 2—which forms part of the Article making provision for action by the Fund should a currency become scarce, and is the only part of that Article of which the Fund has so far made use. Section 2 reads as follows:

The Fund may, if it deems such action appropriate to replenish its holdings of any member’s currency, take either or both of the following steps:

  • (i) Propose to the member that, on terms and conditions agreed between the Fund and the member, the latter lend its currency to the Fund or that, with the approval of the member, the Fund borrow such currency from some other source either within or outside the territories of the member, but no member shall be under any obligation to make such loans to the Fund or to approve the borrowing of its currency by the Fund from any other source.

  • (ii) Require the member to sell its currency to the Fund for gold.

The provisions of Section 2 (ii) involve, of course, the exchange by the Fund of one type of asset for another. They are accordingly dealt with in Chapter 19 below. In the present chapter we shall be concerned only with Section 2 (i).

Very soon after the first general increase in quotas had taken effect in 1959, the increasing volatility of balances of payments resulting from the restoration of external convertibility by European countries began to make the staff question whether the Fund’s resources would be adequate for the greater demands likely to be made upon them. Outside the Fund also, questions of the same sort were being raised. In testimony before the U.S. Congress in January 1960 Mr. Bernstein (former Director of the Fund’s Research Department) suggested that the Fund should take steps to issue debentures for, say, $6 billion to add to the resources available to it in case of emergency.

In February 1961 the Managing Director presented to the Board three proposals for enhancing the Fund’s ability to serve the purposes of the Articles; one of these was a suggestion that use might be made of Article VII, Section 2 (i), to borrow currencies likely to be needed in the event of large drawings. Following up this proposal, the staff submitted to the Board in April a detailed memorandum on the need to borrow currencies, on the amounts likely to be required, and on the conditions under which such borrowings might be made.

Two meetings in May 1961 were devoted to a discussion of these proposals, and showed that the Board was in general favorably disposed toward them but that some Directors felt that it would be important to stress that drawings involving the use of borrowed currencies should be made on terms no less strict than those applied to drawings on the Fund’s own resources. Inquiries made by the staff in continental European countries during the summer showed that there was considerable anxiety on this point, and that the members concerned feared that if their currencies were lent to the Fund, and by the Fund lent, for example, to the United Kingdom, the latter might obtain them on less stringent terms than if it had had recourse to the European Fund controlled by its partners in the OEEC.

The Annual Report for 1961 referred to the possible need for the Fund to utilize Article VII, Section 2 (i);34 and in his speech at the Annual Meeting the Managing Director expanded at some length on the possibility.35 At the same Meeting, however, a discussion among representatives of the main industrial powers, convened by the Secretary of the U.S. Treasury, Mr. Dillon, showed that the apprehensions detected by the staff in Europe were likely to influence the terms on which the members whose currencies would be most needed would be willing to make them available to the Fund. These terms were likely to include a measure of control over the use to which the borrowed funds were put.36

During the last quarter of the calendar year 1961, negotiations for a borrowing arrangement—involving Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States—were undertaken by the Managing Director and members of the staff at a series of meetings with representatives of these countries in Paris. Some difficulty was found in reconciling the philosophy behind the plan, as originally conceived and expressed in a Franco-American draft handed to the Managing Director on November 17, with the provisions of the Fund Agreement. The Franco-American draft would have transferred from the Fund to the member providing borrowed funds the responsibility for deciding whether to permit the use of the Fund’s resources, if borrowed funds were involved. It would also have permitted the member requesting the drawing, and not the Fund, to decide whether the member’s needs should be met from borrowed funds or from the Fund’s own resources. Both these provisions were inconsistent with the principles of the Fund, and were rejected by the Managing Director.

Subsequent drafts of a borrowing arrangement were prepared by the Fund staff. They were communicated to the Executive Directors, but the exclusion of the latter from the actual negotiations was regarded as unfortunate, and the eventual text, although accepted as containing probably the best conditions that could be arranged, still seemed to some Directors to fall short of what was desirable. The General Arrangements to Borrow (GAB), as they were termed, are set out in full in Volume III.37 Here it will suffice to note the main features.

(1) The Arrangements were to be implemented only “to forestall and cope with an impairment of the international monetary system” and only for the purpose of meeting a request to draw on the Fund by one of the participants in the Arrangements.

(2) A participant that proposed to make a drawing, or to seek the repayment of a loan made previously under the Arrangements, if either might necessitate activating the Arrangements, would consult the Managing Director first and then the other participants.

(3) Before making a call on the other participants, the Managing Director would consult the Executive Directors and the participants.

(4) The amount that each participant would lend on a given occasion would be based on its (or its country’s) existing and prospective balance of payments and reserve position.

(5) When the Managing Director made a call on the participants, they would consult and inform him of the amounts of their currencies that they were prepared to lend. If they could not agree on the distribution proposed by the Managing Director, they would propose an alternative one of the same order of magnitude as his call.

(6) Each request for a drawing which would require the activation of the Arrangements would be dealt with in accordance with the Fund’s established policies.

(7) When such a drawing was repurchased, the Fund would repay the countries from which it had borrowed; in any event it would repay them within five years of the transfer of funds by them for that drawing.

(8) A participant that had lent to the Fund could receive early repayment should it need and request this because its own payments position had deteriorated.

(9) Interest would be payable on sums borrowed, in accordance with a formula which initially yielded a rate of 1½ per cent per annum. The Fund would also pay a charge of ½ of 1 per cent on each borrowing transaction.

Not all these provisions were spelled out in the Arrangements themselves; those summarized in paragraphs (2) and (5) above were contained in a letter sent to the other participants by Mr. Baumgartner, the French Minister of Finance.

The commitments which the participants undertook, adjusted to allow for two minor changes effected in 1962, are set out in Table 12.

Table 12.General Arrangements to Borrow: Participants and Commitments as at December 31, 1965
ParticipantUnits of Participant’s

Currency
Equivalents in Millions

of U.S. Dollars

at 1962 Rates
United StatesUS$2,000,000,0002,000
Deutsche BundesbankDM4,000,000,0001,000
United Kingdom£357,142,8571,000
FranceF2,715,381,428550
ItalyLit343,750,000,000550
Japan¥90,000,000,000250
CanadaCan$216,216,216200
Netherlandsf.724,000,000200
BelgiumBF7,500,000,000150
Sveriges RiksbankSKr517,320,000100
Total6,000

The plan was formally adopted by the Board on January 5, 1962. By October 24, 1962, enough of the participants had acceded to it to bring the Arrangements into operation. The last country to adhere was Canada, which notified the Fund of its agreement in January 1964. The Managing Director subsequently negotiated an arrangement with Switzerland, which is not a member of the Fund, by which Switzerland undertook to lend to a country drawing on the Fund on occasions when the General Arrangements were activated, subject to the completion of an agreement with that participant.38

The first occasion on which the General Arrangements were activated was in December 1964, when the United Kingdom drew under its stand-by arrangement for $1 billion. The amounts borrowed then and for another drawing by the United Kingdom in May 1965 are summarized in Table 13.

Table 13.General Arrangements to Borrow: Borrowings by the Fund, 1964–65(In millions of U.S. dollars)
Amounts BorrowedAmount Still Available
ParticipantDec. 1964May 1965Dec. 1965
Belgium30.037.582.5
Canada15.035.0150.0
France100.0140.0310.0
Deutsche Bundesbank180.0167.5652.5
Italy5.065.0480.0
Japan20.025.0205.0
Netherlands40.037.5122.5
Sveriges Riksbank15.017.567.5
United Kingdom1,000.0
United States2,000.0
Totals405.0525.05,070.0
Table 14.Quotas of Members at Selected Dates1(In millions of U.S. dollars)
Member

Country
Dec. 31

1945
Dec. 31

1950
Dec. 31

1955
Dec. 31

1960
Dec. 31

1965
Afghanistan10.022.522.5
Algeria60.0
Argentina150.02280.0280.0
Australia200.0200.0200.0400.0400.0
Austria50.050.075.075.0
Belgium225.0225.0225.0337.5337.5
Bolivia10.010.010.022.522.5
Brazil150.0150.0150.0280.0280.0
Burma15.030.030.0
Burundi11.25
Cameroon15.0
Canada300.0300.0300.0550.0550.0
Central African Rep.7.5
Ceylon15.015.045.062.0
Chad7.5
Chile50.050.050.0100.0100.0
China550.0550.0550.0550.0550.0
Colombia50.050.050.0100.0100.0
Congo (Brazzaville)7.5
Congo, Dem. Rep.45.0
Costa Rica5.05.05.05.520.0
Cuba50.050.050.050.0
Cyprus11.25
Czechoslovakia125.0125.0
Dahomey7.5
Denmark68.068.0130.0130.0
Dominican Rep.5.05.05.015.025.0
Ecuador5.05.05.015.020.0
El Salvador2.52.52.511.2520.0
Ethiopia6.06.06.09.6315.0
Finland38.038.057.057.0
France450.0525.0525.0787.5787.5
Gabon7.5
Germany330.0787.5787.5
Ghana15.0435.055.0
Greece40.040.040.060.060.0
Guatemala5.05.05.015.020.0
Guinea15.0
Haiti5.02.011.2511.25
Honduras2.50.52.511.2515.0
Iceland1.01.01.011.2511.25
India400.0400.0400.0600.0600.0
Indonesia110.0165.0
Iran25.035.035.070.070.0
Iraq8.08.08.015.064.0
Ireland30.0545.045.0
Israel4.525.050.0
Italy180.0180.0270.0500.0
Ivory Coast15.0
Jamaica20.0
Japan250.0500.0500.0
Jordan3.04.5312.253
Kenya25.0
Korea12.518.7518.75
Kuwait50.0
Laos7.5
Lebanon4.54.54.56.75
Liberia0.511.25616.0
Libya5.079.015.0
Luxembourg10.010.010.011.0315.0
Malagasy Rep.15.0
Malawi11.25
Malaysia25.0830.0358.333
Mali13.0
Mauritania7.5
Mexico90.090.090.0180.0180.0
Morocco35.0952.572.0
Nepal7.5
Netherlands275.0275.0275.0412.5412.5
New Zealand50.0125.0
Nicaragua2.02.02.011.2511.25
Niger7.5
Nigeria50.0
Norway50.050.050.0100.0100.0
Pakistan100.0100.0150.0150.0
Panama0.50.50.50.511.25
Paraguay2.03.53.510.0311.25
Peru25.025.025.030.0337.5
Philippines15.015.015.075.075.0
Poland125.0
Portugal60.0
Rwanda11.25
Saudi Arabia10.0555.072.0
Senegal7.51025.0
Sierra Leone11.25
Somalia11.25
South Africa100.0100.0100.0150.0150.0
Spain100.07150.0150.0
Sudan10.0415.045.0
Sweden100.0150.0150.0
Syrian Arab Rep.6.56.51125.0
Tanzania25.0
Thailand12.512.545.076.0
Togo11.25
Trinidad & Tobago20.0
Tunisia12.0914.1322.5
Turkey43.043.086.086.0
Uganda25.0
United Arab Rep.45.060.060.0105.012120.0
United Kingdom1,300.01,300.01,300.01,950.01,950.0
United States2,750.02,750.02,750.04,125.04,125.0
Upper Volta7.5
Uruguay15.015.015.015.030.0
Venezuela15.015.015.0150.0150.0
Viet-Nam12.5216.5322.5
Yugoslavia60.060.060.0120.0120.0
Zambia50.0
Totals7,600.0138,036.58,750.51414,740.71515,976.616

The Arrangements were originally introduced for four years, with the proviso that they could be renewed if the decision to this effect was taken by October 23, 1965. The question of renewal was discussed in the Board on April 28, 1965. A number of changes were then mentioned as desirable, including the elimination of the requirement that the international monetary system should be in danger of impairment and of the limitation of borrowings to drawings by participants. Some simplification of the method of activating the Arrangements was also suggested. As, however, it seemed likely that such changes would not be approved by the participants, the Chairman proposed, and the Board approved, that the Fund should seek a continuation of the Arrangements without amendment.

After consultation with the participants, it was agreed that the Arrangements should continue until October 23, 1970, subject to a review within two years from the expiry of the original four years (October 23, 1966), and subject to the right of any participant to withdraw at any time during the three months ending October 23, 1968.

E.B. Decision No. 595–3, July 20, 1950; below, Vol. III, p. 222.

See above, Vol. I, pp. 97–98.

See also Oscar L. Altman, “Quotas in the International Monetary Fund,” Staff Papers, Vol. V (1956–57), pp. 129–50.

For a discussion of the interpretation of this provision, see above, Vol. I, pp. 367–68.

See Chapter 18 below, pp. 421–22.

Resolution 1-13, Summary Proceedings, 1946, p. 56.

Resolutions 2-3 and 2-4, Summary Proceedings, 1947, pp. 35–36.

Summary Proceedings, 1947, p. 20.

Resolution 3-5, Summary Proceedings, 1948, p. 48.

Measures for International Economic Stability.

Resolution 427(XIV), July 8, 1952.

An updated version was printed in Staff Papers, Vol. III (1953–54), pp. 181–227, and is reproduced below, Vol. III, pp. 311–48.

Summary Proceedings, 1957, pp. 22, 42, 62, 86, 139.

The report was published on September 16; see below, Vol. III, pp. 349–420.

Resolution 13-10, Summary Proceedings, 1958, p. 178.

Enlargement of Fund Resources Through Increases in Quotas, pp. 11, 12; below, Vol. III, p. 427.

Resolutions 14-1, 14-2, 14-3, 14-4, Summary Proceedings, 1959, pp. 158–62.

Resolutions 15-2, 15-3, 15-4, 15-11, Summary Proceedings, 1960, pp. 158–60, 169.

Resolution 17-2, Summary Proceedings, 1962, p. 221.

Compensatory Financing of Export Fluctuations: A Report by the International Monetary Fund; below, Vol. III, pp. 442–57.

E.B. Decision No. 1529-(63/33), June 14, 1963; below, Vol. III, p. 222.

Resolutions 18-19, 18-20, 18-21, Summary Proceedings, 1963, pp. 264–65.

Resolutions 19-1, 19-4, 19-5, 19-16, 19-17, 19-19, Summary Proceedings, 1964, pp. 254, 256–58, 266–67, 268; Resolutions 20-1 through 20-5, Summary Proceedings, 1965, pp. 241–45.

Resolutions 19-2, 19-3, 19-7, 19-18, Summary Proceedings, 1964, pp. 255–56, 259, 267–68.

Annual Report, 1964, pp. 35–36.

Ibid., pp. 36–37.

Resolution 19-20, Summary Proceedings, 1964, p. 269.

See Vol. I above, pp. 579–83.

Annual Report, 1965, pp. 124–32. See also below, Vol. III, pp. 458–65.

Resolutions 20-6 and 20-7, Summary Proceedings, 1965, pp. 245–49.

Resolutions 20-9 through 20-13, Summary Proceedings, 1965, pp. 252–57; Resolutions 21-1 and 21-2, Summary Proceedings, 1966, pp. 236–38.

E.B. Decision No. 488-(56/5), January 25, 1956; below, Vol. III, p. 275.

Ibid., pp. 275–76.

Annual Report, 1961, p. 19.

Summary Proceedings, 1961, pp. 27–29.

Ibid., pp. 54–55, 64, 117.

E.B. Decision No. 1289-(62/1), January 5, 1962; below, Vol. III, pp. 246–52.

E.B. Decision No. 1712-(64/29), June 8, 1964; below, Vol. III, p. 254.

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