Chapter 3: Exploring Techniques for Reserve Creation (1964–65)
- International Monetary Fund
- Published Date:
- February 1996
Following the Annual Meeting in Tokyo in September 1964, the Fund accelerated its search for answers to the perplexing questions related to international liquidity and for ways to augment the volume of liquidity that the Fund was providing through existing methods. Primary attention was devoted to the latter. In line with the resolution adopted by the Governors at Tokyo to the effect that the Executive Directors should consider the question of a general adjustment of quotas, the second round of general increases became the main focus of the Fund’s work on liquidity in 1964–65. By February 1965, the report requested by the Governors had been prepared by the staff and adopted by the Executive Board.1
Deliberate Reserve Creation Studied
Attention to the enlargement of quotas reflected the Fund’s emphasis at the time on the expansion of conditional liquidity. The 1965 Annual Report stated that “ideally, countries’ needs for additional liquidity could be met by adequate increases in conditional liquidity.”2 But the Fund was also aware, and this too was spelled out in the 1965 Annual Report, that in practice most countries did not regard conditional and unconditional liquidity as equivalent. For various reasons, countries liked to have the major proportion of their liquidity freely available, that is, without conditions. Consequently, even if conditional liquidity were to be expanded, some countries might still attempt to increase their owned reserves by adopting balance of payments policies which, from an international point of view, might be regarded as undesirable. Therefore, as a second important part of their work on liquidity during 1964–65, the Executive Directors and the staff intensified their examination, begun the previous year, of the ways in which the Fund might bring more unconditional liquidity into existence.
This examination was concerned principally with the problems and techniques involved in “deliberate reserve creation,” the term now used to distinguish the creation of reserves through some collective or international action from additions to reserves stemming from the traditional sources of gold production and the building up of balances in the currencies of particular countries.
In addition, the Executive Directors and the staff, mindful that the discussions concerning liquidity had led to suggestions that the operation of the whole international monetary system be reviewed, undertook to appraise how well the existing system had been functioning.
Building on Existing System
The Fund approached its examination of the techniques for increasing liquidity with caution. Compared with the existing mechanisms, any method for deliberate creation of reserves was unprecedented. Several important and entirely new issues had to be thought through, and answers had to be found to a number of questions that monetary officials had not covered in past discussions: How should the world’s need for reserves be measured? In what form should any new reserves be made available? Who would create such reserves, and how? What would be the position in the international payments system of the novel reserve units compared with gold and foreign exchange reserves? How should these units be distributed initially—that is, how broad should be the group of countries that would first receive the newly created liquidity, either to spend or to add to reserves? What institutional provisions should be made to ensure proper management of the volume and functioning of the new reserves?
Both the Managing Director, Mr. Schweitzer, and the Deputy Managing Director, Mr. Frank A. Southard, Jr., made it clear that they were looking for solutions based on the existing international monetary system. Earlier, in a speech in March 1964, for example, Mr. Southard had pointed out that the studies in process looked to arrangements which, with emphasis primarily on gradual evolution rather than on the adoption of spectacular remedies, would provide for an adequate growth of liquidity and continuing improvement in international financial cooperation.3
On his way back to Washington from the Tokyo meeting, Mr. Schweitzer, in a speech at Bombay University, repeated this theme, saying, “it seems to us that the task of ensuring an adequate supply of liquidity does not require any drastic overhaul of the present arrangements.”4
Wanted: A Universal Scheme
The management of the Fund was also looking for techniques that would, or could eventually, encompass all countries—not only all the industrial countries, which still held differing views, but also the developing countries. The Managing Director stressed repeatedly that he favored a mechanism for creating liquidity that was all-embracing. Addressing the National Foreign Trade Convention in New York on November 16, 1964, for example, Mr. Schweitzer dealt with the then controversial question of the size of the group of countries which should participate in any new arrangements for the creation of international liquidity, and spelled out why he believed all countries ought to be included:
First, decisions determining the creation of new international liquidity directly affect all the world. Too little liquidity could permit a crisis to develop in which most of the world would tend toward economic stagnation and would suffer from declining trade. Excessive creation of liquidity would lead to inflation with its attendant instability and a tendency for excessive fluctuations in the terms of trade. The fact that all countries are vitally affected by whatever action may be taken would suggest that all should have some voice in the decision.
Second, the benefits of participating in the creation of reserves are substantial. Those countries included in the arrangements have at their disposal liquidity created through cooperative action, liquidity which those outside any such arrangement have to earn with balance of payments surpluses. It would seem equitable that all countries should have an opportunity to participate in the benefits, and it would seem particularly regrettable if the poorer countries were those excluded.
Finally, any division of the 102 countries which are Fund members raises problems of defining the groups and drawing a line between them. An examination of various criteria for such a division will, I believe, show that there is no basis for a sharp line of demarcation. In particular, the criterion which is often regarded as the most relevant in making such a division—that is, the level of a country’s reserves—does not correspond to the grouping usually suggested. There are among countries outside the major industrial group a number that hold relatively high reserves. Furthermore, as there is a continuous gradation of industrialization in the countries of the world, it is impossible to draw the line clearly between industrial and nonindustrial countries.5
In Mr. Schweitzer’s view these considerations, among others, weighed heavily in favor of using the Fund for any liquidity-creating arrangements. The Fund was the truly worldwide organization already operating in this field. In this area, as in others, he believed that the Fund could, “through responsible leadership, provide the unifying force among all countries, industrialized and agricultural, developed and developing, creditor and debtor, rich and poor.” Futhermore, he was optimistic that an appropriate solution would be found: “I feel confident that, in spite of different attitudes and opinions among countries on particular questions, this [international] cooperation will continue to strengthen and will provide conditions which will further enhance the growth of the world economy and the expansion of international trade.”6
Two Possible Techniques for Creating Reserves
With these terms of reference—a scheme that was universal and that worked within the principles of the existing international monetary system—the staff, in the latter part of 1964 and the first nine months of 1965, began to explore in more detail the ways in which the Fund might create additional reserves. Two main possible methods were devised. One, the drawing facilities made available by the Fund on a virtually automatic basis could be extended. Two, as an alternative, arrangements could be set up that would be similar to open market operations in domestic monetary creation: the Fund could, for instance, purchase assets from the national monetary authorities of participants in a liquidity scheme. This second method was called Fund “investment,” the Fund’s purchasing of assets being considered equivalent to the Fund’s investing in participating countries. The investment involved might be in currency or in gold.7 Under the first method, countries’ reserves would increase in the form of liquid claims on the Fund; under the second, by additions to their gold or foreign exchange holdings. In the 1965 Annual Report the term “investment” was replaced by the phrase “the acquisition by the Fund of ‘special assets’,” a phrase which, although less brief, conveyed a clearer picture of the nature of the operation.8
As consideration of these two techniques within the Fund proceeded during the next several months, they came to be referred to, in a kind of shorthand, as (1) the extension of automatism and (2) the exchange of assets (more fully, the acquisition of assets and claims).
Consideration of a third technique was more or less dropped. This technique involved the transfer of gold stocks, by some means not yet specified, from the Fund’s ownership to that of its members, thereby enhancing members’ gold reserves, or, alternatively, the acceptance by the Fund of gold certificates in lieu of gold subscriptions in connection with quota increases; the latter would pro tanto have the effect of providing members with gold tranche positions without corresponding reductions in their gold reserves. The aim of this technique, however implemented, was to limit the increase in the Fund’s stock of physical gold resulting from gold subscription payments. In this way the amount of gold held by members would not be reduced when their drawing positions in the Fund were enlarged. Given the relatively small size of the Fund’s gold holdings, the staff thought that it was unlikely that changes in these holdings would contribute much toward enlarging countries’ reserves.
The studies prepared by the staff on these reserve-creating techniques were intended primarily as a way to examine the possible methods by which the Fund could expand liquidity. No official position—preferring either technique—was taken by the Executive Board. The two techniques—the extension of automatism and the acquisition of assets—contained several features that were later incorporated into subsequent proposals and some that eventually became features of SDRs. A description of the two techniques and of their relative merits, as seen at the time, follows.
Extension of Automatism
The simplest way for the Fund to increase unconditional liquidity was to extend to its members, through its drawing facilities, a greater amount of what the Fund called quasi-automatic liquidity. The discussions on international liquidity that had gone on thus far had made it clear that total international liquidity consisted of a broad range of types of liquidity, running from reserves in the form of gold and foreign exchange to credit facilities. The Fund already provided liquidity over this whole range. At one end, gold tranche and super gold tranche positions and claims under the General Arrangements to Borrow fell within the concept of reserves and constituted unconditional, or quasi-automatic, liquidity.9 In the middle, drawing facilities in the first credit tranche represented liquidity of the conditional type, although the conditionality was relatively slight. Then, as a member moved into the higher credit tranches or on to the upper end of the liquidity scale, requests for drawings were subject to more stringent conditions.
Quasi-automatic drawing facilities could be extended beyond the gold tranche into some part of the credit tranches. The Executive Board could, for example, take a decision under which the ratio of the Fund’s holdings of a member’s currency to the level of quota up to which members could draw on a virtually automatic basis could be raised from the 100 per cent already in operation to some higher percentage of quota, e.g., 105 per cent after one year, 110 per cent after two years, and so on. Such a decision could apply either to all members or only to such members as satisfied certain criteria. The extension of automaticity into the Fund’s credit tranches would be tantamount to the creation of unconditional liquidity.
Because less systematic thought had been given to the possibilities involved in creating reserves through the extension of automatic drawing rights in the Fund than to the more unusual and spectacular methods suggested for reserve creation, the staff examined at some length the details and implications of this means of creating liquidity. If this method was to be used, a number of questions had to be answered. One of these was the question whether an extension of quasi-automatic drawing facilities should be accompanied by a corresponding extension of the Fund’s total drawing facilities. If it was not, there would be some contraction in the amount of conditional drawing facilities available to members, unconditional liquidity having merely been substituted for conditional liquidity.
In particular, countries following conservative financial policies would ordinarily have unused drawing facilities in the gold tranche, and, should their payments positions require them to request drawings in the first credit tranche, they would have no difficulty in obtaining the requested drawings. For these countries, liquidity would not be greatly enhanced by any decision that was limited to giving gold tranche treatment to facilities previously available under the rules governing the first credit tranche. To make extended automatism a more effective way of increasing reserves, it would be necessary to raise correspondingly the maximum level of holdings (presently 125 per cent of quota) that applied to the first credit tranche facilities. Even then, a country would sacrifice an equivalent amount of conditional liquidity for the added unconditional liquidity it acquired, but the amount forgone would lie in the higher credit tranches.
Still other questions attended the expansion of liquidity via extended automatism: Should extended automaticity of drawings be applied to all members, possibly in proportion to quotas, or should it be circumscribed in some way? Even if greater automaticity of drawings was applied to all members, it would enlarge access to the Fund on gold tranche terms only for members that were not, at the time, using the Fund’s resources beyond the new point to which quasi-automatic (or unconditional) drawing rights were extended; countries that had already used their resources in the Fund beyond this point would not acquire the new additions to their reserve positions in the Fund until they had brought down the Fund’s holdings of their currencies into the area of automatism. In other words, what had become known as the “self-qualifying principle” might be used: while access to more unconditional liquidity was, in theory, available to all countries, only those in or close to the gold tranche would actually acquire reserves.
Alternatively, the extension of automatic drawing rights could be confined to some selected category of countries. The ease of drawing could be related, for example, to a country’s record of performance in the Fund. A condition might be that the country had accepted the obligations of Article VIII. Or a condition for a country’s receiving greater quasi-automatic drawing facilities might be that the country stood ready to lend to the Fund additional amounts of its currency. If the latter criterion was used, the Fund’s liquidity would be simultaneously strengthened.
The staff noted that members’ credit positions in the Fund in mid-1965 were such that the amounts of new liquidity created would be substantially greater if automatism was extended to all members rather than confined to some narrower group. The staff noted further that, if reserve creation through extended automaticity of drawings on the Fund was actually to enlarge liquid reserves, countries would have to consider as part of their reserves the full amount of their access to the Fund on gold tranche terms. In other words, countries would have to include in their reserves the amount of drawing facilities available in the gold tranche as defined at that time, the amount in the first credit tranche that would become available on the same terms, claims on the Fund that some countries may have accumulated under the General Arrangements to Borrow, and any claims on the Fund that would arise under new arrangements.
Another question was whether any extension of automatic drawing facilities should be carried out in units as large as a complete credit tranche or in smaller units. Minimum additions to reserves through an increase in quasi-automatic drawing rights need not be as sizable as 25 per cent of quota, the percentage by which gold and credit tranches were presently divided. The magnitude of reserve creation required at annual intervals would probably be smaller—perhaps 5 per cent, rather than 25 per cent, of quota.
A more fundamental problem was how the Fund was to be provided with any supplementary resources that might be necessary for the extension of quasi-automatic drawing rights. These resources could, in theory, be provided by a more rapid growth in quotas than normally took place; however, because such increases in quotas would cause a corresponding growth not only in quasi-automatic drawing facilities but also in conditional drawing facilities, complicated adjustments would have to be made in all of the Fund’s policies on drawings.
Finally, there was the question whether quasi-automatic drawing facilities should occasionally be contracted as well as expanded. The contraction of drawing rights might be especially difficult.
Acquisition of Assets and Claims
A second major way in which the Fund could create reserves was through an operation whereby the Fund simultaneously obtained special assets and assumed additional liabilities. The Fund could purchase securities from participants and create for these participants some liquid loan claims on the Fund that these participants would treat as reserves. From the asset side, this form of reserve creation was described as the acquisition by the Fund of “special assets.” From the liability side, which indicated more clearly that new reserves would thus be created, this technique was called the creation of loan claims, or “special claims,” on the Fund.
The staff explored a number of technical questions presented by this type of reserve creation: What kind of special assets should the Fund purchase? What principles would govern the distribution of purchases among countries? What institutional machinery could be established to enable the Fund and the countries concerned to agree on the amount, the country distribution, and the nature of the assets to be acquired (or, reciprocally, the liquid claims to be created)?
It was necessary that the country distribution of these claims not be based on the balance of payments needs of individual countries. Otherwise, were the Fund to distribute loan claims under some new facility for the same purpose as its usual drawings, the Fund’s regular drawing policies would become confused and undermined. The total amount of the loan claims to be distributed by the Fund should rather be decided on the basis of general liquidity considerations.
Study of this technique of reserve creation also involved thinking through the characteristics that the liquid claims to be created should have so as to be acceptable to countries as reserves. As a starting point, the staff thought that the liabilities would have to have at least the same three characteristics as claims under the General Arrangements to Borrow: (1) they would have to be encashable for useful currency at least as freely as gold tranche positions or be transferable directly to other members; (2) they should have a gold-value guarantee; and (3) they ought to receive a modest rate of interest reflecting the gold value of the claim.
There was also the further question of how the Fund would finance these additional claims. The strain on the Fund’s own resources was likely to require an extension of them either by larger subscriptions or by greater borrowing by the Fund.
The staff, at this juncture, worked out schemes to illustrate to the Executive Directors and to the Group of Ten precisely how the Fund might go about acquiring assets out of borrowed resources and then creating reserves in the form of claims on itself. One such scheme entailed a free acceptance, at least within quantitative limits, of loan claims by other participants. Under another scheme, both the use and the acceptance of loan claims on the Fund would be governed by the principle that such claims would be held by participants in a proportion corresponding to their reserve holdings in other forms. Either scheme involved prior agreement on the types of assets to be purchased that gave rise to liquid claims, and possibly on the principles governing the distribution among participants of these purchases. Under either scheme, appropriate machinery would be established, presumably including the Fund and those countries that had undertaken to lend to the Fund, so that periodic decisions could be made, perhaps at six-month intervals and on the basis of a proposal by the Managing Director of the Fund, concerning the amount, the country distribution, the maturity, and any other features of the assets to be acquired or liquidated over the ensuing six months.
Relative Merits of the Two Techniques
Discussion at an informal seminar of Executive Directors and staff in June 1965 revealed no strong preference for either of the two methods. The staff thought that they ought to be judged mainly on the basis of technical considerations; political considerations were secondary. An important consideration of a technical nature was that the extension of automatism would not require amendment of the Articles but the acquisition of special assets would, and at this time the staff was not at all certain that members would look favorably on amending the Articles. In addition, the amount and distribution of reserve creation through extended automatism would probably be linked to the Fund’s quotas, whereas new reserves could conceivably be allocated on some different principle under the special assets technique. Furthermore, extended automatism would, at least for some countries, involve merely a substitution of unconditional for conditional liquidity. The effects on the Fund’s own liquidity of various techniques of reserve creation through the Fund also had to be taken into account.10
After this examination of the ways in which the Fund might create reserves, it was concluded that further exploration was necessary to judge which basic method would prove the more satisfactory. It was also recognized that some combination of methods might produce the most acceptable results.
After mid-1965, the Fund accelerated its studies of reserve-creating mechanisms. Several reasons prompted this acceleration. For one, now that it had become widely accepted that the traditional sources of reserve growth would be insufficient for any supplementary liquidity that might, in the future, have to be injected into the international monetary system, there was a proliferation of suggested liquidity arrangements. Schemes that had been advocated in the past were refined and additional ones were recommended.
Another reason for the Fund’s intensification of its study of reserve creation was that the countries of the Group of Ten, through the Ossola Group, were exploring methods by which new reserves might be created, and Mr. Ossola had suggested that high priority be given to a comparative assessment of the proposals for collective reserve units (CRUs) that were then being advanced and of the possible techniques for creating reserves through the Fund. As early as during the second meeting of the Ossola Group, in June 1964, Mr. Ossola and delegates from practically all of its members, notably the United States and the United Kingdom, had strongly urged Mr. J. Marcus Fleming, Deputy Director of the Research and Statistics Department, who was the representative of the Managing Director to the Ossola Group, to request the Fund to produce for the third meeting, to be held in July 1964, a paper, however rough and informal, which would set out the possibilities of creating reserve assets through the Fund. Such a preliminary staff paper was prepared and transmitted. When the Ossola Group started to hold frequent meetings after October 1964, requests were often made for the Fund to present additional papers clarifying various schemes. In response, the staff studies discussed in the preceding section were made available to this Study Group.11
A further sense of urgency was imparted to the endeavors both of the Fund and of the Deputies of the Group of Ten as the U.S. Government took measures, early in 1965, to cope with the substantial balance of payments deficit that had re-emerged after the first quarter of 1964. After six years of deficits, the U.S. balance of payments had, at the beginning of 1964, come close to equilibrium for the first time since the trough of the 1961 recession. Moreover, the combined balance of payments of the six member countries of the eec, which had been in surplus for many years, had also been brought to near equilibrium early in 1964. This pattern of relative stability was not maintained, however. Later in 1964 there was not only a major deterioration in the balance of payments of the United Kingdom but, more significantly, the reappearance of a sizable deficit in the balance of payments of the United States and of a large overall surplus in the combined balance of payments of the eec countries.
In February 1965, the U.S. Government announced a comprehensive program to reduce its payments deficit.12 It was accordingly expected that, should that deficit be eliminated, the situation regarding world liquidity could change fundamentally. The rest of the world, which had run a large aggregate balance of payments surplus for many years, would cease to do so. Further increases in international reserves would be limited largely to the amount added to world monetary gold holdings. Already in the first quarter of 1965 international reserves had fallen by about $800 million, a drop that was in contrast to the situation in 1963 and 1964. In 1963 the increase in world reserves, $3.4 billion, had been higher than in any year since World War II, and in 1964 the increase had been $2.5 billion.
In these circumstances it was generally recognized—and the Fund’s Annual Report for 1965 expressed that recognition—that consideration should continue to be given to the twin problems of international liquidity and the workings of the international monetary system.13
Proposals for CRUs
Among the proposals for reserve creation were three or four involving a collective or composite reserve unit (CRU).
The first such proposal was made late in 1963 by Mr. Bernstein.14 He was building on an idea of Professor S. Posthuma, of the Netherlands, who earlier in 1963 had suggested that the burden of maintaining the gold exchange standard could be shared more equitably and the system greatly strengthened if all the big industrial countries would hold an agreed proportion of their reserves in foreign exchange rather than in gold.15 Mr. Bernstein thought that some agreement among the countries of the Group of Ten, plus Switzerland, to standardize the composition of their holdings of gold and foreign exchange and the use of these holdings in international settlements could help to alleviate any possible shortage of world liquidity. Accordingly, he recommended that the large industrial countries establish a new international reserve unit, equivalent to gold, consisting of a stated proportion of each of the 11 currencies concerned. A reserve unit might consist, for example, of about 50 cents in U.S. currency and lesser amounts of pounds sterling, French francs, deutsche mark, guilders, lire, Canadian dollars, yen, etc. The participating countries would be free to hold their reserves in any form, but holdings of gold would have to be matched by a minimum amount of holdings in reserve units. The ultimate objective would be for each country to hold reserve units totaling at least one half of its gold reserves.
To create the reserve units, each participating country would deposit its own currency with the International Monetary Fund, acting as trustee, in an amount equal to its pro rata share of the reserve units to be created. In return, each country would be given a credit on the books of the trustee, denominated in reserve units. The currencies held by the Fund would be guaranteed against loss from exchange depreciation. The participating countries would be obliged, when requested by the monetary authorities of other countries, to convert balances of their currencies into gold and reserve units.
Mr. Bernstein saw as the advantage of his proposal that it would involve little change in the international monetary system. Gold would remain the basis for the value of currencies, the new reserve unit would have a fixed gold value, and official holdings of the currencies of the participating countries would be convertible into gold, although only in combination with reserve units. With such a system, the monetary reserves of the 11 countries could continue to grow without being hampered by a potential inadequacy of monetary gold. The system would also help to equalize, for all participating countries, the ratio of gold to foreign exchange in their reserves. Finally, all 11 currencies would be used as foreign exchange reserves, thus eliminating any inequities that might occur from the use of only a few reserve currencies. Later, Mr. Bernstein refined and elaborated his ideas.16
Mr. Robert V. Roosa, Under Secretary of the U.S. Treasury, in The Elihu Root Lectures for 1964–65, proposed another type of CRU.17 A third scheme for a CRU was prepared by French experts and outlined in a speech by Mr. Giscard d’Estaing, Minister of Economy and Finance, at the Institut d’Etudes Bancaires et Financières, in Paris, on June 15, 1965.18
Features in Common
These proposals for a collective or composite reserve unit were carefully examined by the Fund staff. The several schemes were seen to be similar in their basic characteristics. First, a reserve unit, or CRU, was to come into being. It was to be a unit for transfer from one monetary authority to another, and was not to be used by monetary authorities for direct intervention in exchange markets. The unit would be created by an exchange of liabilities or claims between a trustee and each participating country. The units issued as liabilities of the trustee would be secured by counterpart assets, such as deposits by participants of gold or of promissory notes equivalent in amount to the value of the units distributed to them. Participants would accept the liabilities of the trustee as reserves but need not deduct from their reserves their liabilities to the trustee, since the latter would remain dormant until such time as the scheme was liquidated or any participant withdrew. In other words, the contributions of the participants were to be in the nature of IOUs acquired by the trustee and normally retained unused.
What was essential to the process of creating reserves was not so much the acquisition of assets that might remain unusable as the willingness of the participants, within certain limits or through certain procedures, to accept them in settlement of international transactions. The contributions under the CRU schemes thus differed from the quota subscriptions to the Fund, which resulted in a pool of currencies for use in the Fund’s operations.
A second feature common to CRU schemes was that agreed amounts of CRUs would be created by a relatively small group of countries. Some schemes limited participation to the countries of the Group of Ten; some also included Switzerland. A few suggested that the countries of the Group of Ten be augmented by a small number of other countries. However, no proposal included anything like all members of the Fund.
Third, the amount of CRUs to be created was to depend upon the group’s collective appraisal of the world’s need for reserves. Finally, the initial distribution of CRUs was to be made to each participant according to some agreed formula without reference to its balance of payments position. Points three and four meant that both the creation and the distribution of CRUs were to take place without regard to the balance of payments situation of individual countries, that is, the creation and distribution of CRUs were not to be linked to the actual financing of external payments deficits.
The Issue of Decision Making
In the view of the Fund staff, one of the principal decisions that had to be made in respect of any scheme of reserve creation, whether a CRU or some other arrangement, concerned the amount of reserve units that would be periodically created or canceled. How would the amounts of reserves to be created be determined? More specifically, who would make such decisions? This issue of decision making was crucial, and one that was still unresolved. Each devotee of CRUs had a different suggestion. The French authorities believed that such decision making was basic; hence, their proposal called for “the rule of unanimity”—all participants in any scheme would have to consent to any creation of reserves. Mr. Bernstein’s original proposal had not dealt with this subject, but he later suggested that the participating countries might enter into an agreement to create a stated amount of reserve units each year for five years. As an illustration, he mentioned annual amounts of $1–1.5 billion. Any change from the level agreed to in the initial agreement would be subject to unanimous consent.
Mr. Roosa had come up with fairly elaborate rules for the decision-making process. The decisions on the amounts of reserves to be created would be ratified by the same majority as that required to amend the Articles of Agreement of the Fund, i.e., three fifths of the members having four fifths of the total voting power. He further suggested that proposals for changing the amounts should be handled analogously to proposals for activating the General Arrangements to Borrow, in that initiation and approval would be distinguished from each other. A proposal could only be initiated by a “Governors’ Committee on Fund Units,” a committee to be formed in which each participant would be represented and would have voting rights based on the accumulated amount of its contribution. Nonparticipants would also be represented, but with a minority vote.
Given the condition that any participant would be free to take up all, or part, or none, of its potential share in each new increment of reserve units, Mr. Roosa thought that it should be possible to reach decisions in the Governors’ Committee without insisting on unanimity. A proposal initiated in this fashion would then be presented for approval to all the Fund Governors and decided on the basis of, perhaps, a two-thirds vote weighted by existing quotas. The Roosa formula, while providing for a multilateral process of decision making, preserved for each country the right not to accept its share in a given distribution of new reserve units.
Many elements of this formula were later to find their way into the decision-making process agreed for the creation of SDRs.
Size of the Group
The question of the size of the group to be included in any CRU scheme, although essentially political, had, by the middle of 1965, taken on economic overtones. The advocates of CRUs thought that participation had to be limited because the international economic behavior of the industrial countries differed from that of the developing ones. In their view, the industrial countries needed substantial reserves, not because they wanted to acquire real resources from other countries but because they needed adequate reserves to help to finance, temporarily, the large and growing amounts of world trade and financial transactions. They wished to have the freedom of action that would come with having sufficient liquidity but did not intend that this should have a permanent effect on their demand for real resources. It was, therefore, possible for them to think about creating liquidity in advance of need and distributing it unconditionally to a small number of countries.
The number of countries was small because most other countries were chronically short of reserves and, if given more, would consider them as capital and proceed to spend them. Industrial countries would find themselves buying back with larger exports of goods and services the newly created reserves that had been given to the developing countries. Furthermore, if the developing countries were made participants in a CRU scheme, they might find the CRU route a most attractive way to obtain funds for economic development, and vote for annual increments of CRUs in excess of the global needs for liquidity. Hence, proponents of CRU schemes thought that not all countries could be made participants.
When the Executive Board was considering the draft Annual Report for 1965, the question of the size of the group turned very much around this economic issue. There was considerable discussion about the transfer of real resources involved in any new reserve asset. Executive Directors for the continental European members of the Group of Ten urged that increases in international liquidity should not be effected in such a way as to result in the transfer of real resources. Their wish was that increased liquidity should be provided only to countries that, in general, would hold it in the form of additions to their reserves; they therefore considered that the machinery which evolved should exclude the developing countries from participating in any distribution of international liquidity.
Executive Directors for the developing countries were strongly opposed to this view. They suggested that the objective of increasing international liquidity, that is, to ensure the smooth functioning of international trade, could best be achieved if the additional liquidity was moved into the hands of those who were prepared to spend it, rather than confining it to those who would merely hold it.
Reactions of Management and Staff to CRU Proposals
It was in this atmosphere that the management and staff, in mid-1965, began to explore how the Fund should react to the various proposals for CRUs. They strongly preferred the reserve-creating techniques which they themselves were working out. While the CRU proposals limited the distribution of new reserves to a few countries, the techniques being studied in the Fund would be applied to all Fund members. Indeed, there was concern that the establishment of a CRU on a narrow basis in the Group of Ten could have disastrous effects on the international monetary system. CRUs could not take the place of dollars and sterling in world reserves, least of all in the reserves of the countries outside the Group of Ten. Financial authorities of nonindustrial countries were already asking the Fund’s officers how they should operate if CRUs came into being. There might be an even greater stimulus than there had been in the past for the developing countries to establish their own regional payments arrangements.
On the other hand, some of the staff advocated that the Fund at least keep the door open for a Fund-managed CRU scheme. They thought that, given the divergent views prevailing among the Group of Ten in the spring of 1965, the only scheme on which it might be possible to achieve a consensus would be some kind of CRU arrangement. In fact, the staff noted a convergence of thinking among the monetary authorities of the United States, just before the 1965 Annual Meeting, toward a CRU arrangement operated through the Fund, and thought that at least eight of the other nine countries of the Group of Ten might be in favor of some sort of “CRU in the Fund.”
The staff therefore considered whether it was possible that a CRU scheme might be so framed that the criteria by which countries were initially admitted to the scheme would be defensible by the Fund’s standards—such as that all Article VIII countries would be eligible to participate, and that the scheme would be open ended, that is, other countries could join later. If the CRU had a broad base and was not rigidly tied to gold, the Fund might be able to examine such an arrangement with an open mind.
After consideration, however, the Managing Director decided not to support any of the CRU schemes in his public statements and not to use any of them as a basis for the Fund’s techniques. He preferred the stand that he had been taking over the past year, namely, that all Fund members must be included in any new reserve arrangements.
The management and staff had several reservations about CRUs. They doubted that the criteria that the Fund would want to apply for participation in a CRU scheme could be negotiated with the countries in the Group of Ten. Furthermore, even if some open-ended scheme were to be negotiated right away, it would not begin to operate until the countries of the Group of Ten had resolved their much more fundamental differences on whether there was any need at all to create additional liquidity. They also believed that in circumstances where agreement among the Group of Ten to create liquidity could be obtained—for example, if the world economic situation looked very unsatisfactory—any CRU scheme, with its emphasis on distributing reserves to a limited group, might be quite ineffective in stimulating world recovery. Yet staving off recession was one of the principal objectives of greater world liquidity.
Ossola Group Report
From May 1964 to July 1965, concurrently with the developments just described, the Ossola Group had also been examining the possibilities of deliberate reserve creation. Fund staff had regularly attended the meetings of this group.
Following preliminary meetings in May, June, and July 1964, the group met in Rome for five days, October 26–30, 1964, to scrutinize alternative approaches to the creation of reserves: the various CRU proposals, the techniques of creating reserves through the Fund, a suggestion from the Canadian representatives for a Reserve Depository, and the Maudling plan, also referred to as the mutual currency account, in which the representatives of the United Kingdom still had an interest.19
As these meetings progressed, it quickly became evident that the CRU schemes, especially in their original forms, did not have wide support. The features of CRU proposals that particularly gave rise to questions were the relationship between any CRU and gold and the possible adverse repercussions that a CRU scheme would have on reserve currencies. Some participants in the Ossola Group were definitely opposed to CRU schemes, preferring the Fund’s techniques as being more flexible, as being more acceptable politically, and as not requiring new institutional arrangements. Hence, when the Ossola Group met the next time, in Paris, December 14–16, 1964, little attention was paid to the CRU schemes; they were referred to only occasionally by way of comparison with the possibilities of creating reserves through the Fund.
The Ossola Group responded somewhat more favorably to the techniques possible through the Fund. The extension of automatism to the credit tranches gained some adherents, since it had the advantage of keeping intact the liquidity of the Fund. There was a willingness in the Ossola Group also to consider the technique of Fund investment (acquisition of special assets), but there was a desire to narrow the number of possible variants of such a scheme and to clarify the means by which such investment would be financed.
By April 1965 it was evident that the countries of the Group of Ten, through the Ossola Group, were searching for more common ground among themselves but had not yet reached it. The report of the Ossola Group was sent to the Deputies of the Group of Ten on May 31, 1965, and on July 5, 1965 the Deputies decided that the report should be published, subject to agreement of the Ministers. Publication was set for August 10, 1965, again, as in the previous year, to coincide with publication of the Fund’s Annual Report.20
Mr. Emminger, chairman of the Deputies, in a foreword addressed to the Ministers, made it clear that the members of the Ossola Group had been acting as individual experts rather than as representatives of their respective governments, that the findings did not commit any participating country, and that the Study Group had not attempted to pass final judgments on or express preferences for individual proposals. Its mandate had been “to assemble the elements necessary for an evaluation by the Deputies of the various proposals.” It had not, for example, undertaken to expand the area of common ground, to suggest compromises between opposing views, or to reduce the range of choice among alternative proposals. The report classified the different types of proposals as follows:
Creation of reserve assets by a group of countries
Collective Reserve Unit scheme
Group schemes associated with the Fund
Creation of reserve assets through the Fund
Normal drawings in credit tranches
Enlargement of automatic drawing rights in the Fund
Extension of the gold tranche without gold payment on the occasion of quota increases
Special operation by the Fund
Schemes to provide holders of currency with an alternative asset
Conversion of currency balances into reserve positions in the Fund
Mutual Currency Account
Detailed comparisons were made of the proposals. Further, the report cautiously noted that, while reserve assets might continue to be created by the Fund in the course of assisting individual countries with balance of payments deficits, a situation might arise in which the total stock of reserve assets was inadequate. Attention was called to the general agreement which had been reached that, in these circumstances, deliberate across-the-board creation of more reserve assets would be desirable. The report also went on to recognize that, whatever the form of reserve creation, countries had to be prepared to accept the reserve assets in question in sufficient quantity to ensure that the possessors of these assets could use them in settlements between monetary authorities.
That differences of view on several questions persisted was also pointed out. These questions were (1) the nature of a link between gold and the new reserve asset, the closeness of that link, and its consequences for the existing international monetary system; (2) the number of countries that would participate in the management and distribution of new reserve assets; (3) the role of the Fund in any scheme for deliberate reserve creation; and (4) the rules for making decisions on liquidity creation.
With regard to the Fund, the report of the Ossola Group revealed that the general view of the Deputies was that the Fund had important advantages as a center for any new functions that might be needed for the deliberate creation of reserve assets. Various means were considered for dealing with the problem of the Fund’s own liquidity should new reserve assets be both created by, and transferred through, the Fund. The group also stated the majority view that the provision of capital to developing countries was a problem distinct from the creation of reserves, and that there were disadvantages in any attempt to combine the objective of long-term development finance with the objective of greater liquidity, that is, to provide flexibility in the use of domestic monetary policy. But on these issues, as on many other questions, there had been little agreement within the Ossola Group, and the report spelled out the nature of the disagreements.
France and United States Take Opposing Positions
As the several ways suggested for creating liquidity were extensively examined and discussed, not only within the Fund and within the Group of Ten but also within the national governments of the major industrial countries, the positions and attitudes toward the various techniques began to crystallize. There were many statements of national objectives and vigorous exchanges of views; opposing opinions were voiced, not only within the Ossola Group but also publicly. Some of the ideas being formulated by the Fund staff were disclosed to economists outside the Fund to help advance technical discussions.21
France Advocates Return to Gold Standard
The position of the French Government, that gold was the crux of the international monetary system, had been repeated time and again, in both private and public meetings. During 1964–65 that view became more deeply entrenched in the minds of the French officials. President Charles de Gaulle and Mr. Giscard d’Estaing both called for a more pronounced role for gold in the international monetary system.22 In a press conference on February 4, 1965, President de Gaulle asked for the total abolition of the gold exchange standard and an immediate return to the gold standard, that is, that balance of payments deficits be settled only in gold. The Fund, the Group of Ten, and the eec should, he stated, start negotiations to this end.
The French press suggested that what particularly troubled President de Gaulle and French monetary leaders about the continued U.S. balance of payments deficit was the extremely large outflows of long-term capital from the United States. These capital outflows reflected substantial investments by U.S. companies in European firms.
In a speech at the University of Paris on February 11, 1965, Mr. Giscard d’Estaing elaborated the French objections to the existing international monetary system. First, the gold exchange standard of the existing system lacked what he called reciprocity. The reserve currency countries—such as the United States and the United Kingdom—could incur payments deficits indefinitely because trading partners would accumulate the currencies of reserve centers, that is, dollars or sterling. Countries whose currencies were not held by other countries as reserves had to settle their deficits in gold or through international credit facilities. The need to correct payments deficits quickly was, therefore, not the same for all countries.
Second, the gold exchange standard lacked strength. While the U.S. dollar remained a strong currency from a national point of view, the assumption that dollars held by foreigners could be converted into gold had become increasingly questionable.
Third, a better mechanism for balance of payments adjustment than was assured under the gold exchange standard was essential. Otherwise, the payments deficits of reserve center countries would continue to persist.
Finally, the gold exchange standard did not provide international liquidity sufficient to permit the growth of the world economy without inflationary pressures. (In other words, the gold exchange standard required payments deficits by reserve centers and the building up of large balances by other countries of the currencies of the reserve centers. Both the deficits and the accumulation of balances were inflationary.)
Mr. Giscard d’Estaing also made more specific the proposal of President de Gaulle for an immediate return to the gold standard by suggesting that (1) the big countries publicly declare that they would henceforth settle their payments deficits only in gold and not through the creation of additional reserve monies; (2) additional liquidity should be provided only through the use of the Fund’s resources, so as to avoid the financing of payments deficits that were of a fundamental character; and (3) the creation of additional international liquidity should be made dependent on a reform of the present system. Central bank reserves should ultimately consist only of gold and of owned reserves based on gold, with foreign currencies being held only as working balances. The process of eliminating the existing international holdings of reserve currencies could be achieved by the repayment of foreign debt. In the meantime, these holdings—most of which were invested in U.S. Treasury securities—should not receive interest. In the event that an international shortage of the means of payment were to develop, additional reserves based on gold could be created by a joint decision of the countries whose currencies were convertible into gold.
Consistent with these views, Mr. Giscard d’Estaing stated that hereafter France would use only gold to settle any deficits it might incur. On June 15, 1965, he reiterated the French position that gold should be the center of the international monetary system and put forward his own proposal for collective reserve units.23
United States Calls for Special Conference
On July 10, 1965, a sharp impetus was given to the debate by the United States. In a bold speech to the Virginia State Bar Association, Mr. Henry H. Fowler, who had been appointed by President Lyndon B. Johnson to be Secretary of the Treasury in his new administration, announced that the United States
stands prepared to attend and participate in an international monetary conference that would consider what steps we might jointly take to secure substantial improvements in international monetary arrangements. …
Our suggestion is that the work of preparation be undertaken by a Preparatory Committee which could be given its terms of reference at the time of the annual meeting of the International Monetary Fund this September.24
Also in mid-1965, as preparation for a possible international monetary conference, the U.S. Congress—through the Subcommittee on International Exchange and Payments of the Joint Economic Committee—held hearings at which a number of experts presented their views.
This stronger push by the United States came in the wake of the measures for dealing with the U.S. balance of payments problem (mentioned earlier in this chapter) which President Johnson announced in a special message to the U.S. Congress on February 10, 1965, less than a week after President de Gaulle had asked for a return to the gold standard.
Among the U.S. measures announced at that time were several aimed at stemming the outflow of private U.S. capital, especially of transfers for direct investment in Europe. President Johnson invoked his statutory authority to apply the interest equalization tax, which the United States had introduced in 1963, to bank loans with maturities of one year or more and asked Congress to extend this tax beyond its expiry date of December 31, 1965 and to broaden it to cover nonbank credits of one to three years’ maturity; previously the tax had not been applicable to nonbank credits of less than three years nor to any bank loans. (Subsequently, on October 9, 1965, a new Act extended the interest equalization tax through July 31, 1967 and broadened its coverage to include nonbank debt obligations of one year or more to maturity.)
In addition, on February 10, 1965 there was instituted a new voluntary foreign credit restraint program. Sets of guidelines were subsequently arranged by which banks, nonbank financial institutions, and nonfinancial businesses were asked to limit their foreign undertakings. Financial institutions were requested to limit the increase in their foreign credits so that by March 1966, at the latest, they would not be more than 5 per cent in excess of their December 1964 levels. The ceiling of 5 per cent for expansion of lendings by financial institutions other than banks was to apply only to loans and investments with maturities of up to ten years. Within these overall limits, priority was to be given to export financing, special care was to be exercised to avoid possible adverse effects on Canada, Japan, and the United Kingdom, and credits to the developing countries were to be given preference. Industrial enterprises were asked to take steps to improve their individual payments balances—by expanding export and other receipts from abroad and by transferring income receipts from, and limiting outflows of capital to, developed countries other than Canada; they were to report on the results to the Secretary of Commerce.
Meanwhile, the other countries in the Group of Ten were continuing to formulate their positions and were considering, within their own governments and with each other, the merits of the various liquidity schemes being proposed, including those put forward by the staff of the Fund.
Managing Director’s Assessment and Action
These circumstances were conducive to further action by the Fund. In a speech on June 2, 1965 at the Institut d’Etudes Bancaires et Financières, in Paris, the Managing Director deliberately expressed his views publicly on the dilemma of whether liquidity ought to be increased or the international monetary system altered.25 He took a broad position, explaining that any plans for the future must grow out of answers to three basic questions: What is the nature of the international monetary system and what do we want it to accomplish? To what extent has the present system succeeded or failed? How can the international monetary system be improved?
Defends Existing System
Mr. Schweitzer described the existing international monetary system as a complex of international rules and understandings, which included the par value system, convertibility, and the absence of exchange restrictions, as well as the arrangements under which countries held their external reserves in the form partly of gold, partly of convertible currencies, and partly of claims on the Fund. The system combined two complementary features, the financing of imbalances and the elimination of imbalances; and the task of managing the system was, in large measure, to strike a balance between the two. The Fund, as the international organization at the center of the system, had had this primary and crucial task.
But he also stressed that it was not enough that international payments should balance. The aim had to be the achievement of equilibrium with the least possible sacrifice of the generally accepted objectives of economic policy: full employment, an adequate rate of growth, reasonable price stability, and freedom from restrictions on current international transactions.
Noting that a return to the gold standard was being advocated in some quarters, Mr. Schweitzer said that he preferred the existing system. He asked monetary authorities to recall that, when the gold standard was in operation, its successes in terms of external balance were attained at the expense of internal objectives, and he underscored his rejection of a return to the gold standard by observing that, in the current world, national authorities placed a high priority on the management of their domestic economies.
Presenting the conclusions of the appraisal of the international monetary system that the Fund staff had undertaken during 1964 and the early part of 1965, Mr. Schweitzer observed that that system had operated fairly well, although a distinction had to be made between the developing countries and the industrial ones. By and large, the developing countries, hampered by structural problems, especially the unsatisfactory development of their export earnings, had found it difficult to achieve simultaneously the goals of rapid growth and internal and external stability. Restrictions on imports and on payments for invisibles had often been resorted to, exchange rates had been depreciated, and internal imbalances had interfered with growth.
On the other hand, for the industrial countries the system had, until the mid-1960s, worked with a very high degree of success. Between 1950 and 1964, production in the industrial countries had expanded at a rate of more than 5 per cent per annum, while the labor force had grown only by 1.3 per cent per annum; the large pockets of structural unemployment, which had at one time existed in most European countries and which had seemed likely to persist, had been largely absorbed. Great progress had also been made in removing barriers to trade and shifting from bilateral to multilateral payments. All the major industrial countries had accepted the obligations of Article VIII of the Fund Agreement.
In defending the present international monetary system, Mr. Schweitzer made it clear that he regarded some of the arguments criticizing the gold exchange standard as being of doubtful relevance. He thought that the argument that the system provided an unfair advantage to one or two reserve currency countries, in that it permitted them to finance their balance of payments deficits painlessly and automatically, was overstated. The real point was that, so long as a reserve center was strong and enjoyed unquestioned confidence, it could finance a proportion of its deficit through an accumulation of liabilities to foreign monetary holders; but as soon as that confidence was weakened, the pressures on the reserve center became at least as strong as, if not stronger than, those on other countries. What he thought was a valid point of objection to the gold exchange standard was that the supply of reserves created depended on the somewhat accidental circumstance of whether the reserve currency countries happened to be running deficits or surpluses, and also on whether there did or did not happen to be confidence in the future value of their currencies.
Notes New Problems
Despite the success of the existing system, the Managing Director recognized that, in the last few years, the unexpected magnitude of short-term capital movements between the main industrial countries had brought new problems. Capital movements were the more difficult to deal with since there were no agreed answers as yet as to the best method of handling them. Should they be considered temporary and financed by the use of reserves? Should current account balances be radically altered to accommodate them? Or, should capital flows be restrained by the use of controls?
A second element which made managing the international monetary system more difficult than it had been was that changes in general price levels between deficit and surplus countries could not be counted on to correct deficit and surplus positions. Modern conditions made economies more rigid and deficit countries could not force down their price levels without provoking substantial unemployment. At best they might be able to stabilize prices. On the other hand, countries in surplus resisted any addition, through increases in their monetary reserves, to the inflationary pressures already prevalent in their economies.
Suggests Elements of a Solution
From the above analysis Mr. Schweitzer deduced that the aim should be to supplement and not to supplant the present system. This process, he stressed, would be greatly facilitated if the payments deficits of the United States and the United Kingdom were corrected. Then, aggregate official holdings of dollars and sterling would become a relatively stable part of world reserves and it would not be necessary to transfer these holdings to the Fund in exchange for gold-guaranteed claims on the Fund, as some had been suggesting. He also concluded that a change in the price of gold would not improve the system of reserve creation; such a change would serve mainly to augment initially the value of gold holdings and would not add much to subsequent accruals to reserves.
The Managing Director once again outlined some of the reasons why he preferred the schemes for creating liquidity through the Fund. In the first place, the Fund was already equipped to finance the temporary balance of payments deficits of its members, including those of the industrial countries, by a mixture of conditional and unconditional liquidity. A second advantage lay in the variety and flexibility of the methods of creating reserve assets that were available through the Fund.
But, more importantly, it seemed to him to be highly desirable for the maintenance of good relations among countries in all stages of development that the richer nations of the world should not appear to be clubbing together to create reserves—out of nothing as it were—for themselves alone. By entrusting this function to the Fund, all countries, in proportion to their role in the world economy, could be given their due share both in the control over the creation of reserves and in the benefits of that creation. It need not be feared that countries urgently needing resources for development, or for other purposes, would run away with the process of reserve creation or that creditor countries would be faced with burdens which they were not willing to assume. The Fund had amply demonstrated that it could administer a worldwide pool of resources guided by policies to assure the proper use of those resources.
Attempts a Governors’ Resolution
When several monetary officials of the eec countries protested this speech by the Managing Director on the ground that it was premature for the Fund to say anything about the possibilities of creating liquidity through the Fund, Mr. Schweitzer took the view that the Fund could not remain silent while the Group of Ten spoke freely. It also appeared that the countries of the Group of Ten, urged on by those in the eec, might decide to study international monetary questions on their own without putting their decision up for discussion or approval by the Fund’s Board of Governors.
In these circumstances, Mr. Schweitzer favored what appeared to be the onset of a more activist and broader approach by U.S. officials. Recognizing that a committee of Governors of the Fund could be a useful addition to the Fund’s machinery, even if a world monetary conference was never convened, and whatever the outcome with respect to international liquidity, the view developed within the Fund management that the preparatory committee for an international conference suggested in Mr. Fowler’s speech could be a committee composed of Fund Governors. Such a committee, with the Managing Director as chairman, should have a balanced composition of about 15 Governors—probably the Governors for the countries in the Group of Ten but also 5 other Governors (such as those for Australia, India, a Middle Eastern member, an African member, and a Latin American member). Appropriate relations between the committee and the Executive Directors would be specified.
Accordingly, while the U.S. authorities considered the terms of reference for a preparatory committee, and while U.S. technical staff evaluated the various proposals for reserve creation, the Managing Director attempted to obtain support for a resolution of the Board of Governors at the Twentieth Annual Meeting, which would take place in a few weeks. The resolution would be directed to answering such questions as by what mechanism the liquidity discussions could be brought into the Fund, how the Executive Directors and the Group of Ten could collaborate, and what the composition of a preparatory committee would be.
It began to appear, however, that such a resolution would cause undue controversy. The U.S. authorities were willing to bring the discussions on liquidity into the Fund, but several European countries wished to keep them within the Group of Ten. Mr. Schweitzer dropped his efforts to obtain a resolution. But this attempt in 1965 to get a committee of the Board of Governors as part of the Fund’s machinery was in a sense a forerunner of proposals that the Managing Director made on several subsequent occasions and was thus a lineal ancestor of the Committee on Reform of the International Monetary System and Related Issues (Committee of Twenty) that was established in 1972.
States Again: “Liquidity Is the Business of the Fund”
In his opening address at the Twentieth Annual Meeting, on September 27, 1965 in Washington, the Managing Director repeated his conviction that the Fund was “ideally and flexibly constructed to perform the new tasks and to provide the new facilities that may be found to be needed in the course of the continuing evolution of the international monetary system,” and he repeated what he had said to the Governors two years before, that “international liquidity is the business of the Fund.”26 The staff would, he said, intensify its studies and would present the results to the Executive Directors for their consideration. Further, he believed that it would be very useful to seek ways by which the efforts of the Executive Directors and those of the Deputies of the Group of Ten could be directed toward a consensus on desirable lines of action. He suggested that the Board of Governors would serve ideally as the appropriate forum should an international monetary conference be considered necessary.27
Mr. Schweitzer was also more specific concerning the criteria that should be kept in the forefront as this work proceeded. First, the functioning of the international monetary system and the adequacy of the sources of international liquidity were matters of concern to all members. Second, new or improved facilities should be designed with the requirements of all members in mind. Third, this comprehensive approach, while it did not preclude the possibility that new facilities would be available to countries meeting reasonable and agreed tests, meant that any new facility should be available to all countries which could meet those tests. Fourth, the new facility should be so constructed as to ensure that additional liquidity was not created in a measure that would have an inflationary impact on the world economy, and there must be adequate safeguards to protect the quality of members’ reserves.28
The Managing Director’s remarks were endorsed by several Governors, especially by Governors for countries not in the Group of Ten.29
Agreement by Group of Ten on Contingency Planning
At the 1965 Annual Meeting, the differences that had existed in earlier years among the Governors for the countries in the Group of Ten continued. Messrs. Colombo (Italy), Blessing (Federal Republic of Germany), and Giscard d’Estaing (France) reiterated the warnings that they had given in 1964: excessive liquidity would result in persistent inflation; countries in deficit should give priority to attaining balance of payments equilibrium.
Mr. Colombo, taking the line of the report of the Deputies of the Group of Ten of May 1964 and the 1964 Annual Report of the Fund, thought that gold and reserve currency assets, together with a wide range of credit facilities, were fully adequate for present needs and most probably for some years to come. There was, therefore, no case at present for any further increase in the volume of liquidity, and, in fact, the problem really came down to avoiding any decrease in unconditional liquidity.30
Mr. Blessing stated similarly that he could see no urgent need for additional liquidity, especially in view of the considerable increase in Fund quotas that was now taking place. Multilateral surveillance within the Group of Ten had represented a useful step in the direction of stricter balance of payments discipline, but he believed that still more should be done to lay down specific rules of conduct for adjusting external disequilibria.31
Mr. Giscard d’Estaing took the same tack. He believed that the problem to be dealt with in the immediate future was one of too much liquidity rather than too little. He advocated “a discipline equally urging all countries to adjust their domestic economies to external financial balance requirements, without excessive delay, although naturally without undue rigor.” His conclusion was that “the main contribution by reserve currency countries to an international monetary reform is the restoration of a durable balance in their external accounts. This preconditions the study of any other device.”32
Other Governors for the countries in the Group of Ten agreed. Indeed, the idea that there was nothing urgent about supplementing the volume of world reserves had been almost universally accepted for about a year by the officials of the Group of Ten.
Along with this emphasis by the countries of the eec on attaining payments equilibrium and on discipline, there were reassurances at the 1965 Annual Meeting from the United Kingdom and the United States that measures were being taken to rectify their balance of payments deficits. Mr. James Callaghan (United Kingdom) reported that the United Kingdom was “firmly set on the course of recovery from the serious balance of payments deficit we suffered in 1964 and from the consequential period of uncertainty for sterling that followed. As a result of the drastic measures we have taken, our overseas deficit is being steadily reduced and this, together with the assistance we have received, has made it clear to all that the present parity of the pound sterling is not in question.”33 He proceeded to outline the measures being taken by his Government for the betterment of the U.K. balance of payments.34
Mr. Fowler, at the first of four Annual Meetings he was to attend, cited various facts and figures showing a significant improvement in the U.S. balance of payments. He further stated that the programs would be “vigorously pursued until we are certain that the conditions have been created in which equilibrium in our international accounts can be sustained.”35
First Phase of Contingency Planning
In this environment it was possible for the Ministers and Central Bank Governors of the Group of Ten to agree only to draw up a plan for reserve creation that could be put into effect should the need arise. The wording of a communiqué that they issued on the second day of the 1965 Annual Meeting revealed the complex process by which even this degree of agreement had been attained.36 They noted with approval that the program of multilateral surveillance that they had recommended in August 1964 had been put into effect, that the deficit in the U.S. balance of payments was being corrected, and that the United States had expressed its determination to maintain equilibrium in its balance of payments. Only after making these points did the Ministers and Governors conclude that it was important to undertake, as soon as possible, “contingency planning” so as to ensure that the future needs of the world for reserves would be adequately met.
Paragraph 7 of the communiqué stated that, as the first phase of contingency planning, the Ministers and Governors had given instructions to their Deputies to resume on an intensified basis their previous discussions and to report to the Ministers, in the spring of 1966, on the scope and basis of agreement that could be reached on improvements needed in the international monetary system, including arrangements for the future creation of reserve assets, as and when needed. It was also specified that during these discussions it would be desirable for the Deputies to continue to have the active participation of representatives of the Managing Director of the Fund, the oecd, and the bis.
The remarks made by the Governors for the countries of the Group of Ten in the days that followed their communiqué indicated that there were differences in the sense of urgency with which they viewed the need for any liquidity plan. Mr. Callaghan, welcoming the initiative that Mr. Fowler had taken in July, was eager to proceed: “The time has come for negotiation leading to the preparation of a plan that can be put into effect as soon as agreement exists on the need to do so.” Agreeing with the Governor for Italy that the problem of any new arrangements for reserve creation was essentially political, Mr. Callaghan argued that now was the time for governments to see how far they were prepared to forgo their own particular preferences in the interests of securing agreement. He suggested, too, that a careful reading of the report by the Ossola Group “leads to the conclusion that positions which may seem very far apart are in fact preferences about different ways of achieving the same end.” He thought that any differences were not irreconcilable.37
Mr. Walter L. Gordon (Canada) stated the situation as follows:
Discussions concerning the international monetary system have continued in the Fund, in oecd, and among the Deputies of the Group of Ten. But we have not reached firm conclusions as to what needs to be done to improve the international system, and the time has come to increase the tempo of our work. We cannot wait until the need for action is upon us before reaching agreement upon the most appropriate solution.38
But even among those who attached the least urgency to the need for reform, there was at least a willingness to engage in formulating a contingency plan. Mr. Blessing indicated that, while he did not share the view that the disappearance of the U.S. payments deficit must necessarily lead to an immediate shortage of liquidity, his Government agreed to “contingency planning with a view to providing suitable machinery for increasing liquidity if the need for it were really to arise.”39 Mr. Colombo similarly did not disagree that preparations ought to be made in good time.40
Thus the road had been paved for the countries of the Group of Ten to come to the same conclusion as had the Executive Directors of the Fund—that it was important to consider well in advance the principles and techniques by which liquidity would be expanded should the need for such expansion arise.41
Second Phase of Contingency Planning
The communiqué issued by the Group of Ten on September 28, 1965 also explicitly recognized that, once the countries of the Group of Ten had reached “a basis for agreement on essential points,” discussions would have to include the countries outside the Group. Thus, the last paragraph of the communiqué read:
9. The Ministers and Governors recognize that, as soon as a basis for agreement on essential points has been reached, it will be necessary to proceed from this first phase to a broader consideration of the questions that affect the world economy as a whole. They have agreed that it would be very useful to seek ways by which the efforts of the Executive Board of the Fund and those of the Deputies of the Group of Ten can be directed toward a consensus as to desirable lines of action, and they have instructed their Deputies to work out during the coming year, in close consultation with the Managing Director of the Fund, procedures to achieve this aim, with a view to preparing for the final enactment of any new arrangements at an appropriate forum for international discussions.42
Here again, the speeches made during the Annual Meeting revealed considerable differences of approach. Some European Governors still held the view that reserve assets were not to be created for purposes of economic development. Mr. Colombo, for instance, was emphatic in his view that “the decision to create new reserve assets should not be made to depend upon the needs to finance external deficits or the economic development of the less developed countries; these requirements should continue to be financed by traditional means.”43
Mr. Blessing repeated the view that the responsibility lay with a limited group:
It seems to me that the responsibility connected with any creation of additional liquidity should be borne by a limited group of industrial countries, as only those industrial countries are in a position to back such a scheme by their own resources. This does not mean that other countries are excluded later on from such deliberations nor does it necessarily mean that newly created liquidity would be distributed only to assist this limited group.44
On the other hand, the Governors for the United Kingdom and the United States were much more eager to extend the discussions beyond the Group of Ten. Mr. Callaghan looked forward to the time when the results of the efforts of the Fund and the Group of Ten could be brought together. He explicitly interpreted paragraph 9 of the communiqué in these words:
I take this to mean that, at the next stage, countries which are not included in the earlier discussions will be brought fully into the picture before there is any final enactment of such new arrangements as may be agreed. This stage is necessary in order to ensure that the basic interests of all members of the Fund are adequately represented and appropriately considered, for all countries have a vital interest in such arrangements. Only after this has been completed should we be able to proceed to the final stage of enacting the new arrangements at an international conference.45
Mr. Fowler explained at length the importance to the United States of the “second phase” of preparation. This phase should, he stressed, be designed primarily to assure that the basic interests of all members of the Fund in new arrangements for the future of the world monetary system would be adequately and appropriately considered and represented before significant intergovernmental agreements for formal structural improvements of the monetary system were concluded. Insisting that “all the countries of the free world have a fair and reasonable claim that their views must be heard and considered at an appropriate stage in the process of international monetary improvement,” he welcomed paragraph 9.46
As suggested by his brief remarks at the closing session of the 1965 Annual Meeting, Mr. Schweitzer was encouraged by what he saw as overwhelming agreement on three points—that liquidity was a matter that concerned all countries; that the interests of all members were best reconciled by international discussion in the Fund; and that general action to deal with the problem of liquidity should be taken within the framework of the Fund.47
See Chap. 2, pp. 33–34, above.
Annual Report, 1965, p. 15.
Speech by Frank A. Southard, Jr., to the Jno. E. Owens Memorial Foundation in Dallas, Texas, March 27, 1964, reproduced in Supplement to International Financial News Survey, Vol. 16 (1964), pp. 113–16. Reference is to p. 115.
Speech by the Managing Director before the University School of Economics, Bombay University, September 29, 1964, reproduced in Supplement to International Financial News Survey, Vol. 16 (1964), pp. 361–64. Reference is to p. 362.
Speech by the Managing Director to the National Foreign Trade Convention, New York, November 16, 1964, reproduced in International Financial News Survey, Vol. 16 (1964), pp. 441–45. Quotation is from pp. 444–45.
Ibid. Quotation is from p. 445.
Annual Report, 1964, pp. 38–39.
Annual Report, 1965, p. 19.
Super gold tranche position: the difference between the Fund’s holdings of a member’s currency and 75 per cent of the member’s quota when those holdings were less than 75 per cent. (For the definition of gold tranche position, see Chap. 2, footnote 1, above.)
These effects were discussed by J. Marcus Fleming in his “Effects of Various Types of Fund Reserve Creation on Fund Liquidity,” Staff Papers, Vol. 12 (1965), pp. 163–88.
The deliberations of the Ossola Group and its report are discussed at greater length later in this chapter; see pp. 58–61 below.
Annual Report, 1965, Chap. 2.
Edward M. Bernstein, “A Practical Program for International Monetary Reserves,” Model, Roland & Co., Quarterly Review and Investment Survey, Fourth Quarter, 1963, pp. 1–8.
S. Posthuma, “The International Monetary System,” Banca Nazionale del Lavoro, Quarterly Review, September 1963, pp. 239–61.
See “Further Evolution of the International Monetary System,” Moorgate and Wall Street, Summer 1965, pp. 51–70; also four papers in Guidelines for International Monetary Reform, U.S. Congress, Joint Economic Committee (Hearings Before the Subcommittee on International Exchange and Payments), 89th Cong., 1st sess. (Washington, 1965), Part 2, Supplement, pp. 230–81.
The lectures were sponsored by the Council on Foreign Relations, New York, and were subsequently published as a book entitled Monetary Reform for the World Economy (New York, 1965).
“La politique monétaire internationale de la France,” in Exposés de M. Valéry Giscard d’Estaing, Ministre des Finances et des Affaires Economiques, sur les problèmes monétaires internationaux (Paris, 1965) and in Les problèmes monétaires internationaux (Paris, 1965), pp. 39–55; reprinted in Problèmes Economiques, August 1965, pp. 1–7.
See Chap. 1 above, p. 24.
Group of Ten, Report of the Study Group on the Creation of Reserve Assets (Washington, 1965). For a brief summary of the report, see International Financial News Survey, Vol. 17 (1965), p. 297.
See J. J. Polak, “The Report of the International Monetary Fund,” American Economic Review (Papers and Proceedings of the Seventy-Seventh Annual Meeting of the American Economic Association), Vol. 55 (1965), pp. 158–65.
Le Monde, Paris, February 6 and 13, 1965.
Referred to in the section on Proposals for CRUs, p. 54 above.
U.S. Treasury Department, Press Release, July 11, 1965, and reported briefly in International Financial News Survey, Vol. 17 (1965), p. 251.
Speech by the Managing Director at the Institut d’Etudes Bancaires et Financières, Paris, June 2, 1965, reproduced in Supplement to International Financial News Survey, Vol. 17 (1965), pp. 209–16.
Opening Address by the Managing Director, Summary Proceedings, 1965, pp. 31 and 30.
Ibid., p. 30.
Ibid., pp. 30–31.
For example, Statements by the Governor of the World Bank for Iran, the Governor of the Fund for Iraq, the Governor of the Fund and the World Bank for Australia, and the Governor of the Fund for New Zealand, Summary Proceedings, 1965, pp. 65, 74, 78–79, and 156.
Statement by the Governor of the Fund for Italy, Summary Proceedings, 1965, pp. 41–42.
Statement by the Governor of the Fund for the Federal Republic of Germany, Summary Proceedings, 1965, p. 117.
Statement by the Governor of the World Bank for France, Summary Proceedings, 1965, pp. 123–26. Quotations are from pp. 123 and 124.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1965, pp. 85–86.
Ibid., pp. 86–87.
Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1965, p. 103.
Communiqué of the Ministers and Governors of the “Group of Ten” Issued on September 28, 1965, Summary Proceedings, 1965, pp. 279–81.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1965, pp. 88 and 89. Mr. Fowler’s speech was discussed above, p. 63.
Statement by the Governor of the Fund and the World Bank for Canada, Summary Proceedings, 1965, p. 55.
Statement by the Governor of the Fund for the Federal Republic of Germany, Summary Proceedings, 1965, p. 118.
Statement by the Governor of the Fund for Italy, Summary Proceedings, 1965, p. 42.
Annual Report, 1965, p. 19.
Communiqué of the Ministers and Governors of the “Group of Ten” Issued on September 28, 1965, Summary Proceedings, 1965, p. 281.
Statement by the Governor of the Fund for Italy, Summary Proceedings, 1965, p. 43.
Statement by the Governor of the Fund for the Federal Republic of Germany, Summary Proceedings, 1965, p. 119.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1965, p. 89.
Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1965, pp. 106–107.
Concluding Remarks by the Managing Director, Summary Proceedings, 1965, p. 226.