- International Monetary Fund
- Published Date:
- February 1996
The Six Years from January 1, 1966 to December 31, 1971 were extremely important ones in the history of the International Monetary Fund. They were filled with turbulence and fundamental change in the international monetary system, all of which directly affected the functions and activities of the Fund. At the beginning of this period—in January 1966—it was already apparent that the world economic environment was changing radically. Among other things, short-term flows of capital were becoming larger and more difficult to manage by the methods that had been devised in the early 1960s. Moreover, concern that the supply of liquidity in the monetary system might prove insufficient had intensified, and monetary officials were in the midst of a debate on the need to introduce some innovative mechanism for deliberately creating reserves to augment that liquidity. Eventually, in 1969, special drawing rights (SDRs) were established in the Fund. The advent of SDRs was certainly the zenith of the Fund’s first twenty-five years. And later, when full-scale reform of the international monetary system was being negotiated, many monetary experts were to look upon their establishment as the first part of a general monetary reform.
The years 1966 through 1971 featured, however, not only the creation of SDRs but also the onset of the disturbances that caused the breakdown of the Bretton Woods system and the need for discussions on monetary reform.
Even before the first SDRs could be allocated, the international monetary system was being subjected to stresses and strains more severe than any experienced since World War II. The imbalance in international payments and the flows of short-term capital from one money center to another that had emerged in the late 1950s and the early 1960s became steadily greater, and the resulting problems became increasingly harder to solve, or even to alleviate. Consequently, exchange crises became a regular feature of the international scene, especially after November 1967. News that traditionally had been relegated to the financial pages made front-page headlines when, in the next three and a half years, sterling was devalued, a single official price for gold was abandoned and a two-tier gold market set up, the French franc was devalued, the deutsche mark was revalued, and floating exchange rates for the Canadian dollar, the deutsche mark, and the Netherlands guilder were introduced. Then, on August 15, 1971, came the suspension by the United States of convertibility into gold of officially held dollars. As a result, two basic tenets of the Fund’s Articles of Agreement—the system of agreed par values and the convertibility of dollars into gold—were no longer operative. The system designed at Bretton Woods a quarter of a century before had collapsed. The Ministers and Central Bank Governors of the Group of Ten, meeting at the Smithsonian Institution in Washington in December 1971, reached agreement on the realignment of the currencies of their countries, and subsequently the Fund’s Executive Board adopted a decision on a temporary regime of central rates and wider exchange rate margins. The crisis was so profound, however, that virtually everyone recognized the urgent need for a thoroughgoing reform of the international monetary system.
Thus this period in the Fund’s history, one of trying to hold together the Bretton Woods system through severe stresses and strains, was distinctly different from either the preceding twenty years or the years following 1971. In the two decades 1945–65 there had been tremendous progress toward the attainment of the goals for which the Fund had been established. Reconstruction of the economies devastated by World War II had been accomplished, and the world had benefited from a signal expansion of international trade and investment. Most members of the Fund had achieved agreed par values or, at least, fixed exchange rates. Currency convertibility had been restored. Restrictions on current international payments were far fewer than they had been for decades, and even controls on capital, permitted by the Fund’s Articles of Agreement, had been reduced much more than had been thought likely. The International Monetary Fund had become a successful instrument for international cooperation and consultation in the monetary and financial fields.1 The years immediately after 1971 formed another epoch, one characterized primarily by a very ambitious attempt to achieve a multifaceted reconstruction of the international monetary system.
Scope and Coverage of this Narrative
At the outset of the period 1966–71 the world’s monetary officials were deliberating the problem of international liquidity. They had been discussing this problem for several years, but they were by no means agreed that the supply of liquidity in the international monetary system was actually inadequate or that unusual new arrangements for creating liquidity were necessary. Consensus on any particular mechanism for deliberate creation of reserves was even more remote. It was agreed only that it was important to formulate a plan for creating reserves should the need arise in the future. In the next few years continuous discussion took place, inside and outside the Fund, both about issues and about particular proposals, until August 1969 when the facility for special drawing rights (SDRs) became a part of the structure of the Fund.
The establishment of SDRs was, without doubt, the most striking achievement of the Fund in the years 1966–71. Hence, after a description (in Chapters 1, 2, and 3 and a part of Chapter 4) of what transpired with regard to international liquidity before 1966, the rest of Part One and all of Part Two of this volume are devoted to tracing the evolution of SDRs and the first two years of experience with them.
The earlier history of the Fund discussed at some length the subject of the adequacy of the world’s reserves and the two relevant Fund reports issued during the 1950s, but described only briefly the stirring of concern about international liquidity and the Fund’s attention to it, through 1965, as reflected in the Annual Reports of the Executive Directors and the Annual Meetings of the Board of Governors. In this volume, therefore, only a few paragraphs are devoted to the events of the 1950s, but developments from 1960 through 1965 are treated more fully. Chapter 1 describes what happened in the field of international liquidity before 1963. Following the pattern of Volume I, Chronicle, of the earlier history, Chapters 2–8 of the present volume, which deal with the birth of SDRs, trace the events in 12-month intervals from one Annual Meeting to the next; the Annual Meetings usually brought to a head the debates and negotiations of the preceding year, and in nearly every year the Board of Governors took actions that helped to resolve the impasses that had been blocking further progress. The chapters on other topics are not so arranged, but cover time periods suitable to the topic.
Part Three examines the developments in 1966–71 that pertain to the use of the Fund’s regular resources, which were placed in a General Account after the introduction of SDRs. The economic and financial circumstances of the late 1960s and early 1970s presented several challenges to the Fund with respect to the use of its general resources, and the Fund responded in a number of ways. Changes were made in the original provisions of the Articles of Agreement governing use of resources and repurchases (Chapter 13). The compensatory financing facility, set up in February 1963 to give assistance to primary producing members experiencing temporary shortfalls in their export earnings, was extended and liberalized, and for the first time many countries began to make drawings for this purpose (Chapter 14). Developing countries also sought assistance from the Fund and the World Bank on the problem of stabilizing primary product prices, and after considerable study the Fund introduced a facility for financing buffer stocks (Chapter 15). To meet the unprecedented recourse to the Fund’s resources by both industrial and developing countries, members’ quotas in the Fund were enlarged, particularly by a third round of general quota increases (Chapter 16). Drawings from the Fund were significantly higher than in any other period since the Fund commenced operations in 1947 (Chapter 17).
Most drawings took place under stand-by arrangements. Because of the expanded use of this instrument, the Executive Board reviewed the Fund’s policy on the use of its resources under stand-by arrangements and adopted guidelines to ensure uniform and equitable treatment for all members. Financial programming associated with stand-by arrangements became one of the Fund’s major activities. These developments, together with some description of the stand-by arrangements agreed with two industrial and three developing members and the related economic circumstances, form the subject of Chapter 18. Augmented drawings, as well as other factors, had important ramifications for the Fund’s other financial operations and transactions, such as the charges on drawings, the policies on repurchases, its own budget, the size of its net income, the distribution of some of that income, and the investment of its assets. These developments in the Fund’s other finances are taken up in Chapter 19.
In a period filled with dramatic events, some of the most interesting pertained to gold: there was the breakup of the single market for gold transactions, the introduction of a two-tier market for gold, and new developments in the Fund’s policies toward purchases and sales of gold, including gold from South Africa. These events are discussed in Part Four (Chapter 20).
Consequential as were the foregoing developments, it was the disturbances in exchange markets that presented the most difficulty for the world’s financial authorities. Hence, another major portion of the volume, Part Five, deals with exchange rates. During the years covered here there were a number of important changes in exchange rates. Among the major currencies, there were, first, the devaluation of sterling in November 1967 (described in Chapter 21), and then the devaluation of the French franc in August 1969 and the revaluation of the deutsche mark in October 1969 (described in Chapter 22). There were also devaluations of the Indian rupee (1966), the Ghanaian cedi and the Finnish markka (1967), the Icelandic króna (1968), and the Turkish lira and the Ecuadoran sucre (1970). Also in 1970 Canada reintroduced a fluctuating rate. These developments, together with a description of the initial par values established and the new monetary units introduced from 1966 to 1970, are covered in Chapter 23.
Recurrent crises in exchange markets led to calls for reform of the international monetary system, particularly to proposals for changing the par value system. Hence, international monetary officials had to direct their attention to the broad question: should the mechanism by which exchange rates were adjusted be altered, and if so, how? Chapter 24 describes the review of the mechanism of exchange rate adjustment that the Executive Directors undertook in 1969 and 1970. In 1971 there occurred events in the field of exchange rates that were even more reverberating than those that had taken place earlier, and the system of par values was suspended for what was considered to be a temporary period. These events are set forth in Chapters 25, 26, and 27. Chapter 25 deals with the events from January 1 through August 15, 1971 that culminated in the suspension by the United States of the convertibility of officially held dollars into gold. Chapter 26 describes at some length the difficult negotiations preceding the Smithsonian agreement of December 1971, and Chapter 27 explains the temporary regime of central rates and wider margins that the Fund thereupon established.
Finally, Part Six (Chapters 28–30) presents an overview of how the Fund grew and changed as an institution during the six years ended with 1971. The Fund had to assume new responsibilities and functions as the world of international monetary and financial affairs expanded and became more complex. Consultations with members were expanded, technical assistance to members became much more extensive, new responsibilities were assumed with regard to external debt negotiations of members, and the Fund became a center for the collection and dissemination of information on economic and financial problems.
The story of the Fund’s genesis and of its activities to the end of 1965 has been related at length in The International Monetary Fund, 1945–1965; Twenty Years of International Monetary Cooperation: Vol. I, Chronicle, by J. Keith Horsefield; Vol. II, Analysis, by Margaret G. de Vries and J. Keith Horsefield with the collaboration of Joseph Gold, Mary H. Gumbart, Gertrud Lovasy, and Emil G. Spitzer and edited by J. Keith Horsefield; Vol. III, Documents, edited by J. Keith Horsefield (Washington, 1969). Hereinafter cited as History, 1945–65.