Chapter 4: Search for a Contingency Plan for Reserve Creation (1965–66)
- International Monetary Fund
- Published Date:
- February 1996
In Contrast to the Exploratory Nature of the discussions that had taken place in 1964–65, the discussions in 1965–66 were intentionally directed toward laying a basis for further action. Both the Group of Ten, in its communiqué of September 28, 1965, and the Fund had expressed a desire to reach a consensus about reserve creation. For much of the year, however, there was little momentum in the discussions. It was only after the Fund took an important initiative in March 1966 that a consensus on which further action could be based began to appear possible.
Economic Circumstances Facilitate Agreement
In the meantime, evolving economic circumstances also were conducive to a reconciliation of the strong differences of view about the need for reserve creation that had persisted. One such circumstance was that the deficits of the two reserve currency countries, the United Kingdom and the United States, and the surpluses of continental European countries were declining. The U.K. authorities had instituted several measures to restore domestic and external equilibrium, and the U.K. deficit on current and long-term capital account, which had been $2.2 billion in 1964, was reduced to less than half that amount in 1965. Similarly, the balance of payments deficit of the United States turned out to be lower in 1965 than in any year since the late 1950s, when it first became a problem. The net outflow of private capital from the United States had been curtailed by official programs for limiting capital outflow and by a progressive tightening of monetary and credit policies. Interest rates in the United States moved upward quite markedly: after January 1966 the yield on Treasury bills was at a height that had been touched only briefly after the stock market crash late in 1929, and the yield on medium-term government bonds was higher than at any time since shortly after World War I.
Reduction of the U.S. and U.K. deficits helped the discussions to progress. Since the French in particular had been insistent that the deficits of reserve currency countries be eliminated prior to agreement on any plan to create liquidity, the remarks of Mr. Giscard d’Estaing before the National Assembly on October 13, 1965 are noteworthy. Calling attention to the change of tone and attitude which had characterized the Annual Meeting just concluded, he said that he was impressed that the reserve currency countries had specifically confirmed that they now realized the necessity of restoring equilibrium in their balances of payments prior to any new action.
The second economic circumstance conducive to progress in the discussions about the need for reserve creation was that, as some officials had expected and feared, world reserves did not increase as much as they had in the past. Some new form of international reserve asset or mechanism for enlarging liquidity was, therefore, considered to be much more essential than it had been earlier. For the first time in the postwar period all the industrial countries either were enjoying virtually full employment or, as was the case for France, Italy, and Japan, were again entering an expansionary phase of the business cycle following a period of recession. As a consequence, many authorities believed that reserves in the traditional form of gold and dollars were not increasing sufficiently to finance the volume of world trade and other international transactions associated with such worldwide prosperity. The concern about the rate of growth of reserves was the greater because private gold hoarding in 1965 reached another high. The official dollar holdings of a number of European countries declined, partly because they became reluctant to hold continuously larger amounts of dollars, and in contrast to their earlier practice they requested the U.S. Treasury to convert dollars into gold. Inasmuch as the official dollar holdings of non-industrial countries rose substantially, there was little change in the aggregate official dollar holdings of all countries. But even then, the increase in world reserves for 1965 turned out to be only $1.7 billion, much smaller than that for 1964 and only about half the annual average for the preceding decade. Moreover, much of the increase in total world reserves that did take place in 1965 was attributable to transactions by the Fund.
Thus, the experience of 1965 suggested that the continuance of balance of payments deficits in the countries that were reserve centers was no longer necessarily bringing about a growth in world reserves. Indeed, sterling balances had not shown an upward trend during the entire postwar period; consequently, it could not be said that the U.K. payments deficit had been adding to international reserves. And in 1965 it became apparent that deficits in the U.S. balance of payments did not inevitably contribute to an increase in world reserves either: the U.S. deficit in 1965 was not financed by an increase in foreign dollar holdings.
Intensified Discussions by Group of Ten
Against this background, the Deputies of the Finance Ministers and Central Bank Governors of the Group of Ten began to meet regularly. In the year ended September 1966, they met as frequently as every five or six weeks, usually in Paris but also in Washington, April 19–22, in Rome, May 17–19, and in Frankfurt, June 22–24. Mr. Emminger (Federal Republic of Germany) continued to serve as chairman until after the “Outline of a Facility Based on Special Drawing Rights in the Fund” was agreed to in September 1967. Technical monetary specialists usually accompanied the Deputies to the meetings. Many of the Deputies also continued to meet as members of Working Party 3 of the Economic Policy Committee of the oecd, which was under the chairmanship of Mr. Emile van Lennep, of the Netherlands.
Even some of the procedural arrangements suggested a more determined effort on the part of the Deputies to try to achieve a consensus among themselves. Instead of the arrangement under which the functions of a secretariat had been performed by staff members from national delegations, a three-man secretariat, consisting of one person each from the Fund, the oecd, and the bis, was formed to keep records of the discussions. Papers indicating positions or outlining proposals were prepared by the staffs of the national delegations. Studies by the Fund staff on relevant topics were made available to the authorities of the countries in the Group of Ten as well as to observers from Switzerland, the oecd, and the bis.
Closer Liaison with Executive Directors
At the outset of the year starting in September 1965, a somewhat closer official liaison between the Deputies and the Executive Directors of the Fund was established. During an informal session of the Fund’s Executive Board on November 3, 1965, several Directors, finding their position vis-à-vis the Deputies increasingly awkward, argued that a fuller exchange of information between themselves and the Deputies was desirable if a contingency plan for reserve creation acceptable both to the Group of Ten and to the Fund was to be found. Otherwise, the two bodies might come up with divergent plans.
At the next meeting of the Deputies, two days after the Executive Board’s informal session, it was agreed that the representatives of the Managing Director, following consultation with the chairman of the Deputies, might report back to the Executive Directors on the trend of the proceedings without disclosing positions of individual Deputies. Conversely, the Managing Director’s representatives would interpret to the Deputies the current thinking of the Executive Directors without identifying the views of individual Directors.
The representatives of the Managing Director to the meetings of the Deputies of the Group of Ten throughout the years covered in this volume were Mr. J. J. Polak, appointed to be The Economic Counsellor in May 1966, who attended the meetings regularly, and Mr. Joseph Gold, appointed to be The General Counsel in May 1966, who attended whenever legal questions were being discussed.1 These two senior staff officials participated actively in the discussions of the Deputies—advancing and defending many of the basic principles that were ultimately adopted—and reported to the Executive Directors within a few days after attending each meeting. Mr. J. Marcus Fleming, Deputy Director of the Research and Statistics Department, and Mr. George Nicoletopoulos, Deputy General Counsel, represented the Managing Director at these meetings when Mr. Polak and/or Mr. Gold could not attend. In addition, the Director of the Office in Europe, Mr. Jean-Paul Sallé, attended some of the meetings.
When the Deputies met on November 5 and 6, 1965 to begin consideration of a contingency plan, it was in an atmosphere more of prenegotiation than of negotiation. Most governments, still with an open mind on the major issues, sought clarification of technical points and expressed only provisional positions. The basic question of whether any new reserves were needed at all was still of intense interest. Most of the Deputies had come to believe that reserve creation would probably have very little immediate influence on world economic conditions—in alleviating cyclical swings, for example, and particularly in cushioning recessions. Creation of reserves would therefore have to be guided by longer-run or secular trends, with adjustments of requirements for reserves in the short term being handled by credit facilities.
The majority of Deputies remained convinced that responsibility for creation of reserves should rest with a limited group of countries, although that limited group need not necessarily be the Group of Ten. A variety of views prevailed, however, as to the size of the group that should participate in the distribution of the reserves that were created. Whether distribution should be in proportion to Fund quotas or in proportion to Fund quotas plus commitments under the General Arrangements to Borrow was also far from settled. Most Deputies appeared to favor some kind of relation between reserve creation and the Fund, but most had no strong preference between the two methods being developed by the staff for creating reserves through the Fund—automatic drawing rights or acquisition of special assets.
When the Deputies next met, on December 14 and 15, 1965, the discussions, as in the past, were exploratory and still were not yet aimed at coming to any conclusions. Three questions were discussed. The first concerned the relation that any new reserve asset would have to already existing reserves. A minority of the Deputies believed that, before any reserves were created, agreement should be reached on limiting the amount of dollars that would be held in official reserves, particularly in the official reserves of the countries in the Group of Ten.
The second question concerned the process of decision making. One suggestion that found considerable support was that decisions for creating new reserves should be taken in two steps: there would first be a proposal by an international authority, which might be the Managing Director of the Fund, and then a vote would be taken on the proposal, which would be approved only if a specified number of countries voted for it.
The third question concerned the possibility of some parallel reserve creation for other countries if the reserve creation plan then being debated was limited to a small group. There was a growing realization in the Group of Ten that something substantial would have to be done for the countries outside the Group. A few Deputies had begun to think that there might be two parallel schemes—a worldwide scheme for all Fund members and another scheme for countries subject to large-scale capital movements, such as the countries of the Group of Ten. There was also increasing receptivity to the idea that some portion of the reserves created for a small group might be set aside for the countries outside the group and that this “set-aside” might be on the order of 25 per cent of the total reserves to be created.
Emphasis on a Limited Group Continues
The Group of Ten used several arguments to explain why they continued to insist on a basic scheme that limited the number of participants rather than to accept a scheme that included all countries. One argument was that some countries needed reserves to hold while others needed reserves to spend; therefore, two different types of reserves seemed to have logic in an economic sense. Second, the monetary authorities of the countries in the Group of Ten argued that they consulted closely with each other on their balance of payments policies and might eventually adopt a set of rules for balance of payments adjustment or a special regime for working out multilateral surveillance which could be implemented, for example, through Working Party 3 of the oecd. Third, there was a preoccupation in the Group of Ten with what was called the backing for any international asset that might be created and a desire that only countries with the financial resources to do so should undertake such backing. A fourth argument, closely related to the third, was the belief that participants in the inner group should have sufficient financial resources so that, if a created reserve unit was presented to them for conversion, they would be able to provide convertible currencies.
Still a fifth argument advanced for limiting participation in any scheme for reserve creation stemmed from the need to provide for the liquidation of any scheme and for the possible withdrawal of a participant. The monetary authorities of the countries in the Group of Ten thought that participants in a reserve plan would wish to be able to calculate, at any time, what their financial obligations would be should the scheme be ended. Furthermore, a country had to be able to withdraw, or to be expelled if it misbehaved. They believed that, if new reserve assets were distributed to all Fund members, some of the developing countries would not, in the event of liquidity or withdrawal, be able to repay their shares in convertible currencies or gold. Hence, a loss would have to be distributed among the remaining participants; and rules covering the distribution of that loss would have to be prearranged.
Nevertheless, while emphasizing schemes with limited participation, the Group of Ten began to devise ways in which some other reserve asset, in addition, might be provided for countries excluded from the limited schemes.
Four Plans Suggested
The emerging views of the Group of Ten began to take more specific shape early in 1966. Four plans for deliberate reserve creation were presented by national delegations when the Deputies met in Paris from January 31 to February 2, 1966. Mr. Emminger presented a “Draft Outline of a Scheme for Reserve Creation,” which was a compromise between the ideas of Belgium, the Federal Republic of Germany, Italy, and the Netherlands, with the views of France taken into account. The Deputies from the United States submitted an “Outline of a Possible Dual Approach to the Creation of Reserve Assets.” The Deputies from the United Kingdom presented a paper, “International Monetary Reform—Summary of United Kingdom Views,” and the Deputies from Canada a paper, “Future Creation of Reserve Assets—Some Views of the Canadian Delegation.”
These four schemes had several features in common. All provided for the creation of a reserve asset by, and under the responsibility of, a limited group of countries. The group would not be a closed one; new participants would be accepted if they met a certain number of qualitative tests and, at the same time, had sufficient importance in world financial transactions. A figure of 15 countries in total was often mentioned. The distribution of the new reserve asset was to be based in some way on Fund quotas. The amount of reserve assets to be created was to be determined on the basis of trends in world reserves, not on short-term considerations. Periodic decisions—say, every three to five years—were to be taken on the amount to be created during each interval.
More specifically, all four schemes provided for new reserve units, the term used to characterize a new reserve asset that was not in the form of drawing rights in the Fund. The terms used in the discussions were now becoming refined, and the term reserve asset was considered the broader term used to denote a new asset that might be in the form either of drawing rights or of reserve units. The reserve units in the schemes submitted by national delegations to the Deputies of the Group of Ten in January 1966 could be transferred directly between participants and would be backed by a pool of national currencies contributed by participants. The gold value of these currency contributions was to be guaranteed, but the currency balances themselves were to remain blocked or dormant and were to be used only in connection with either the liquidation of the scheme or the withdrawal from the scheme by individual members.
Three of the papers submitted by national delegations to the Deputies also contained proposals for another type of new reserve that would go to countries excluded from the limited scheme, or for a second new reserve that would go to all countries. The U.S. plan suggested unconditional liquidity in the form of “special reserve drawing rights” (SRDR)—the first time that term was used—for all Fund members. These were to be distinct and separate from other drawing rights in the Fund and might be used without regard to a member’s ordinary position in the Fund. They were to be available on terms similar to those applying to drawings in the gold tranche. The plan submitted by the United Kingdom provided for creation of unconditional liquidity for members left out of the reserve unit scheme by extending gold tranche facilities in the Fund across the board, without payment of gold subscriptions.
The plans put forward by the United States and the United Kingdom, and Mr. Emminger’s plan as well, also made suggestions for added liquidity, possibly conditional, that would apply only to countries excluded from the limited scheme. The United States suggested that participants of the limited group allocate to the Fund an appropriate portion of the reserve units received, which would administer them for the benefit of those members excluded from receiving reserve units direct. Alternatively, instead of allocating reserve units to the Fund, participants might allocate to the Fund an equivalent amount in their own currencies. The U.K. scheme called for expanding the compensatory financing facility of the Fund (as had been suggested by the Fund staff)2 and for making a proportion (25 per cent) of the new reserve units available to an international institution, such as the Fund, for provision of added conditional liquidity.
The Emminger scheme noted that countries outside the Group of Ten might also have increasing needs for international liquidity and that these would have to be covered through the Fund, either in the course of its customary activities or by way of special and enlarged facilities, such as more compensatory financing. To meet the Fund’s need for more resources in this connection, it was suggested that the participants in the group receiving reserve units should extend credit lines to the Fund, possibly amounting to 25 per cent of each participant’s quota in the scheme. The Fund would utilize these credit lines to permit additional drawings to be made by countries outside the limited group. The Canadian scheme made no special provisions for countries outside the limited reserve unit arrangement.
Criticism and Defense of Limited Group
The idea that there might be parallel types of reserve creation—a reserve unit for a limited or inner group and conditional drawing rights for all countries, plus, for countries not receiving the reserve unit, possible conditional credit facilities financed by the inner group—was labeled “the dual approach.” It was an approach which the Managing Director consistently rejected, as described later in this chapter. Moreover, the decision of the Group of Ten to take upon themselves the task of trying to achieve a consensus on the principles of a plan to create liquidity began to be rather widely criticized, and even greater objections were being voiced about the possibility that a mechanism would be introduced to distribute new reserves only to a small group of industrial nations. During the 1965 Annual Meeting, Mr. Holt (Australia) had, for example, stated forcefully that “it would not be acceptable to the great majority of members [of the Fund] to have decisions on matters so vitally affecting every one of us determined in substance, if not also in form, by a small and strictly limited group. … The Group of Ten, whatever its voting strength, can in no sense claim to be fully representative of this world institution [that is, the Fund] nor, I imagine, would it claim to be so.” Moreover, Mr. Holt took a stand in advance against any proposals by the Group of Ten that would limit the creation and distribution of new reserves to a small and exclusive group: “Some of those outside the Group are ready and able to assume the obligations involved. They would feel discriminated against if they were denied the opportunity to join in the arrangements made and share in the mutual extension of credits. …”3
In January 1966, Mr. Emminger, referring to the remarks of the Governor for Australia, as well as to those of other Governors at the Annual Meeting, publicly defended both the procedures being followed by the Group of Ten and the limited scheme approach.4 He stressed the difficulties that even a limited group of countries had in formulating rules for balance of payments policy, but he emphasized even more the argument that only a limited number of industrial countries with strong currencies could bear the responsibilities involved. A new type of reserve unit, which would complement gold and the dollar, needed the backing of strong currencies if it was to be a universally acceptable, fully valid means of payment for international obligations. Phrasing his statement so that he spoke for the other countries of the eec as well as for the Federal Republic of Germany, Mr. Emminger explained that the development of the world’s reserve system which the eec countries had in mind simply meant the taking over, by a group of countries qualified to do so, of a responsibility that had been borne thus far in the postwar period by the United States alone.
Response of Developing Countries
While the above discussions and studies were going on within the Group of Ten, the developing countries were becoming disturbed by the prospect that new reserve assets might be created by and for the industrial nations alone. Their interest in the monetary arrangements that were being considered was accelerated by the fact that some of them were having their own financial problems. The balance of payments position of the primary producing countries as a group did not prove to be especially unfavorable in 1965; in fact, they had an aggregate surplus. Also, commodity markets had strengthened, and with high and rising demand in the industrial countries, the export earnings of the primary producing countries increased rapidly. But there were wide differences among countries. The surplus of the primary producing countries as a whole reflected a very large surplus ($1.4 billion) for the least developed of these countries and a substantial deficit ($0.7 billion) for the more developed.5
Of greater concern to the developing countries than their current payments and reserve positions, however, was that the flow of long-term financial resources to them in the last few years had, in the aggregate, been stagnating.6 This leveling off of long-term capital inflow was the more disturbing because the amount of incoming capital already was low. It had failed to grow in a period in which the industrial countries had achieved a continued and substantial rise in their gross national products. The proportion of the aggregate gross national product of the industrial countries devoted to the net flow of aid and long-term capital to the developing countries had fallen to less than ⅔ of 1 per cent. Progress toward easing the terms on which these resources were provided had also been limited.
Action Through the United Nations
By the latter part of 1965 the developing countries had begun to undertake work of their own on the subject of world liquidity. In September the United Nations Conference on Trade and Development (Unctad) sent to the Fund a working paper prepared in the Unctad secretariat, which described developments in the international monetary system for the period 1958–65 and emphasized the interest of the developing countries in the world liquidity problems being discussed and in the prospect for an international monetary conference such as had been suggested by the United States. This paper had been prepared to assist the Expert Group on International Monetary Issues that had been appointed by the Unctad in August.
The Expert Group held meetings in New York from October 11 to 29, 1965, which Fund staff attended as observers. The subsequent report of the group was strongly in favor of a reform of the international monetary system that would make that system more responsive to the needs for economic growth of both developed and developing countries. Noting that, as a result of a growing fear of a shortage of liquidity, the developed countries had tended recently to adopt less expansionary policies, to limit the scale and liberal character of their assistance to developing countries, and to continue their restrictive trade policies, the report concluded that the general level of the world’s reserves was inadequate and should be expanded.7
After examining the needs of the developing countries, the Expert Group rejected the view that the essential need of developing countries was for additional long-term aid rather than for liquidity. The liquidity needs of developing countries were, in fact, considered to be greater relative to their imports than those of the developed countries, and it was believed that those needs would increase with the growth of their economies. Furthermore, most developing countries were conscious of the advantages of having adequate reserves and would hold such reserves if the pressure of competing demands on convertible funds was lessened. In this connection, reform of the international monetary system should be accompanied by the adoption of trade and aid policies that would contribute to the solution of the problem of structural disequilibrium in developing countries.
The report asserted that the pressing needs of the developing countries for additional liquidity should be provided in part by expanding reserves and in part by increasing the amount of credit available from the Fund and other sources, recommending, inter alia, enlargement and liberalization of the Fund’s compensatory financing facility. The conclusions were that (1) the establishment of a link between the creation of international liquidity and the provision of development finance was both feasible and desirable and would be detrimental to neither; (2) the reform of the international monetary system should be truly international; and (3) developing countries should be represented in the discussions leading to monetary reform, and in the operation of the new arrangements, in accordance with the degree of their interests and concern.
The Unctad report was discussed by the Unctad Committee on Invisibles and Financing Related to Trade, in Geneva in December 1965 and again in New York from January 27 to February 4, 1966, after which the committee endorsed the main conclusions of the Expert Group’s report. The committee placed particular emphasis on the idea that all countries that were prepared to take part in the new monetary arrangements and to acquire the rights and accept the obligations inherent in such arrangements should be eligible to participate in the creation of reserve assets.
The follow-up to these studies and discussions by developing countries was to come later, in December 1966, when the General Assembly of the United Nations, at its twenty-first session, adopted a resolution on international monetary reform. The resolution had been proposed by the delegation from Ceylon and had been supported by the delegations of several other developing countries. The resolution requested “the Secretary-General of the United Nations Conference on Trade and Development to consult with the Managing Director of the International Monetary Fund on the progress of activity relating to international monetary reform and to report to the Trade and Development Board at its fifth session through the Committee on Invisibles and Financing Related to Trade.”8
In addition to action through the United Nations, the developing countries, during the year 1965–66, found still other forums through which to make their views known. In March 1966 four monetary officials, requested to do so by the Inter-American Committee on the Alliance for Progress (ciap), issued a report entitled International Monetary Reform and Latin America.9 Endorsing the report of the Unctad experts, they stressed the need of the developing countries in general, and of the Latin American countries in particular, for increased liquidity and suggested that the Latin American countries pool the increase in their directly owned reserves that would accrue under any new arrangements. They also urged that serious consideration be given to the idea of linking the creation of reserve units with the provision of more financial assistance to the developing countries. This report was presented to the seventh meeting of the clap, which was held in Buenos Aires on March 12–15, 1966, and was circulated to the fourth annual meeting of the Inter-American Economic and Social Council, which was held at both the expert and the ministerial level.
The views of Latin American monetary officials on international monetary reform were put forward again, on April 22, 1966, when the Governors of the central banks of Latin America, meeting in Runaway Bay, Jamaica, issued what was referred to as the Declaration of Jamaica. In a significant shift of attitude toward the Fund from that prevalent in the 1950s, these Latin American monetary officials endorsed the Fund, stating that the present mechanisms of the international monetary system should be preserved to the greatest extent possible and that the Fund, with any needed modifications, should continue to be the center of that system. Access to new liquidity was no substitute for an improvement of the Latin American countries’ relative position within the Fund. Such improvement, the Governors explained, could be brought about by increasing members’ quotas and, in particular, by increasing the ratio of unconditional drawing rights to quotas, expanding the compensatory financing facility, and linking repurchase obligations under that facility to the recovery of export earnings.
In May 1966, the developing countries took still other action concerning the prospect of a new mechanism for enlarging world liquidity. A “Group of Thirty-One” developing countries, noting that the Group of Ten was then meeting in Rome and might agree on a scheme for reserve creation in which only a few leading countries would be able to participate, reiterated a principle which had been enunciated in the earlier meetings of the Committee on Invisibles and Financing Related to Trade:
Monetary management and co-operation should be truly international and … all countries, which are prepared to share in both the benefits and obligations of such new monetary arrangements as may be devised, should be eligible to participate in the creation of new reserve assets. The adoption of any scheme which is limited to a small group of countries will be a serious violation of this principle and will endanger the development of international monetary co-operation.10
Background to Managing Director’s Proposals
It was against this background of continued emphasis by the Group of Ten on limited schemes and increasing concern by the developing countries that they would be excluded from new forms of reserves that the Fund took an important initiative. In March 1966 the Managing Director circulated to the Executive Board and to the Group of Ten two proposals for creating liquidity through the Fund. These proposals very much helped to advance the discussions in the Group of Ten; and later their presentation was considered a significant turning point on the road to SDRs. A series of events within the Fund immediately preceded these proposals.
Initiative Suggested by Staff
For some months, at least since December 1965, the Managing Director’s representatives to the meetings of the Deputies of the Group of Ten—the General Counsel and the Economic Counsellor—had been suggesting that it was opportune for the Fund to put forward its own proposals. Most of the country delegations to the meetings of the Deputies of the Group of Ten recognized that the Fund had spent more time exploring the subject of international liquidity than had the national governments of the Group of Ten. Moreover, the effect of the 1965 Annual Meeting had been to make it necessary for the Group of Ten to come up with a proposal that was, in a real sense, acceptable to the other members of the Fund. For these reasons, a concrete proposal by the Managing Director might serve as a fulcrum for the discussions of the Deputies.
The Research and Statistics Department had, in fact, started to sketch the outlines of a Fund scheme, and the Legal Department had begun to investigate whether a reserve-creating scheme could be established within the Fund and what amendments of the Articles would be required.
Further, in an attempt to provide answers to the difficult questions that were still outstanding, the staff had undertaken two comprehensive studies. The first, completed in December 1965, was directed to the question of the number of countries that should participate in the creation and distribution of any new reserve asset, and to the related issue of the criteria on which such creation and distribution should be based. To ascertain the implications of distributing new reserves to all Fund members, rather than to a limited few, this study quantified the effects, country by country, of distributing new reserves to all members on the basis of the various criteria—each participant’s holdings of gold, holdings of total reserves, and Fund quota—that had been talked about in Deputies’ meetings and in informal sessions of the Executive Directors. This examination showed that the distribution of $1 billion of new reserve assets, using any of the alternative bases, would not result in a large amount of new reserve assets for developing countries, nor, indeed, for all countries outside the Group of Ten, taken as a whole. In other words, should new reserve assets be distributed on the basis of any of the criteria that were being considered, the bulk would go to the countries in the Group of Ten. The staff believed that this finding might help to demonstrate to the monetary authorities of the Group of Ten—especially to those in the United States and the United Kingdom who were beginning to feel that restricting the scheme to the large industrial nations might be politically embarrassing—that participation by all Fund members might not be much more costly financially than a scheme with limited participation.
The second study by the Fund staff, completed in January 1966, attempted to answer the questions on the adequacy of world reserves that were constantly recurring in the discussions and were hampering consideration of what mechanisms could be used for reserve creation.11 Was the existing level of reserves sufficient? Was the rate of growth of world reserves satisfactory? When would the need for supplementing existing reserves arise? How large a supplement would be required? How might the need for such a supplement be determined? The staff paper concentrated on how to measure the need for reserves and, in particular, how to distill quantitative estimates of reserve needs from the general criteria for reserve adequacy that had been discussed in the preceding two years. The trends of reserve movements since World War II—actually based on the period from 1951 or 1952 to 1964, inclusive—for several groups of countries were charted and examined. Statistical relations between the levels of reserves and the value of international trade over time, and between the rates of growth of reserves and the growth in the value of international trade, were investigated.
The conclusion of this examination was that quantitative assessment of the need for international reserves was very difficult. It involved, for instance, a number of judgments on which reasonable people might disagree—such as, whether aggregate demand was insufficient or excessive; whether too much or too little time was available for balance of payments adjustment; and what distribution of the burden of adjustment between countries in deficit and countries in surplus was appropriate.
Hence, hard decisions lay ahead as to the amount of world liquidity to be created that would be most conducive to high employment and growth in all countries, internal and external stability throughout the world, and freedom from restrictions on international transactions, the basic objectives of reserve creation. The criteria for the appropriate regulation of the supply of international reserves were much more complicated and their application much more uncertain than for the regulation of domestic monetary policy. The type of information needed for easy determination of how the supply of reserves should be adjusted from month to month in accordance with changing international economic conditions was not available; in fact, there was no agreement on precisely what information was required or on how to evaluate such information. Therefore, if the international community was to undertake the task of adjusting this supply by deliberate international action, it would have to proceed by agreeing on an estimate of the probable need for increases in reserves for a considerable period ahead, and the estimate would need to be revised at not too frequent intervals, perhaps on the basis of rules set down in advance.
Another part of the staff’s examination of the world’s stock of reserves was directed to ascertaining the differences between the amounts of reserves held by developing countries and the amounts held by developed countries. One of the conclusions was that developing countries had the same ratio of reserves to imports as did developed countries.12
Dual Approach Rejected
Meanwhile, the Managing Director continued to look upon the dual approach advocated in the Group of Ten as undesirable. Interpreting it as meaning that the two groups into which the Fund’s membership would be divided would probably receive proportionately equal amounts of new liquidity, but the reserves of the inner group would be of one kind and those of the nonparticipating group of another kind, Mr. Schweitzer put a “separate but equal” stigma on the dual approach. Although Mr. Dale explained that the intention of the United States in the Group of Ten discussions was that there should be two kinds of assets, drawing rights and reserve units, and that at least the drawing rights should be shared universally and fully among the two groups, several Executive Directors for the developing members continued in the informal sessions of the Executive Board to consider a dual approach as discriminatory. Nevertheless, the idea persisted, and as late as May 1966 the Managing Director reported to the Executive Directors that there was still wide support for a dual approach among the Deputies of the Group of Ten.
Action Urged by Executive Directors
In these circumstances, the Executive Directors also urged that the Fund take action. In November 1965 they had begun a series of informal sessions on the subject of reserve creation that continued throughout the following year, concurrently with the discussions going on in the Group of Ten. The Directors were especially interested in what they referred to as the path-breaking staff paper—described above—which tried to quantify the global need for reserves. On this topic, the Directors for several developing countries, particularly Messrs. J. J. Anjaria (India), Luis Escobar (Chile), and Paul L. Faber (Guinea), took the occasion to point out that the staff’s findings demonstrated that the need for reserves was not confined to any particular group of countries.
In February 1966, at a regular session of the Executive Board, after the Directors had heard a staff report on the latest meeting of the Deputies of the Group of Ten, Mr. Ahmed Zaki Saad (Egypt) made a very strong plea for the Fund to advance its own proposals. He had difficulty not with the details but with the circumstances in which the current proposals for reserve creation were being made. The four plans put forward in the Group of Ten, described earlier in this chapter, purported to raise various questions affecting the Fund and its operations—possible increases in automatic drawing rights in the Fund, the creation and distribution of some sort of new unit from which most of the Fund’s members might be excluded, and the making available of new resources in some form for use by the Fund. If these plans were worth considering, why not submit them to the Fund through the Executive Directors concerned? The Fund could not delegate its functions and its duties to the Group of Ten or to any other group. Recalling that great efforts had been made to make the Fund a worldwide institution, Mr. Saad thought that the leading members of the Fund should ask themselves whether they were not, perhaps quite inadvertently, undermining the authority and role of the Fund by imposing subtle barriers to the effective consideration by the Executive Board of matters of great importance to the whole of the Fund’s membership.
Mr. Saad’s remarks were endorsed by most of the Executive Directors for the countries other than those in the Group of Ten, especially by Messrs. Anjaria and Faber and by Messrs. Antonio de Abreu Coutinho (Brazil, Alternate to Mr. Mauricio Chagas Bicalho, Brazil), Amon Nikoi (Ghana), and Enrique Tejera-París (Venezuela). Mr. M. W. O’Donnell (Australia), although recognizing a distinction of interest between countries of the Group of Ten and other countries, also supported Mr. Saad’s views by explicitly agreeing that the Fund should be more positive and active in this matter. If there was to be a solution acceptable to all Fund members, there must be more rapid progress toward finding a consensus within the Fund, and the Fund must urgently attempt to disentangle the main threads of the whole liquidity fabric and to reach broad conclusions to which all could subscribe.
Managing Director Again Speaks Out for Universal Plan
Meanwhile, the Managing Director persisted in his view that all Fund members ought to be included in any scheme of reserve creation and that the Fund ought to be the instrument for any new facility. He referred to the dual approach as a retrogressive development in international monetary relations. When the Executive Directors, in January 1966 in informal session, discussed the staff paper on distribution of reserves, Mr. Schweitzer argued that it would be difficult to find generally acceptable criteria to distinguish between participants and nonparticipants in any arrangement for reserve creation. Moreover, he did not agree that there was a difference in the behavior of countries concerning their reserves. The Fund had often urged its developing members to increase their reserves, pointing out to them, both in general and in individual cases, the severe problems that arose when members tried to conduct their external transactions with inadequate reserves. In a number of its stand-by arrangements, the Fund had even asked for a kind of reserve commitment. Hence, it was almost impossible, he thought, to make a clear-cut distinction between members that needed an increase in reserves to keep and hold and those that did not. As a matter of fact, the aggregate amount of reserves held by developing countries was substantial.
Regarding the global need for reserves, Mr. Schweitzer said at an informal session in February 1966 that, in his view, the significance of the staff paper on that subject lay not so much in its conclusions as in its demonstration that the Fund was the only institution able to take the first step, that is, to try to quantify the need for reserves.
Mr. Schweitzer stressed that any scheme for reserve creation must “start out from the recognition of the legitimate reserve needs of developed and developing countries alike.”13 He voiced these views not only to the Executive Directors and to other monetary authorities whenever the occasion arose but also to the public several times during the latter part of 1965 and the first few months of 1966. In an address before the Federation of German Industries, at Kronberg im Taunus, on April 25, 1966, for example, he explained in detail how a reserve unit scheme could cover all Fund members and emphasized the compelling reasons for avoiding any division of countries into two groups.14 He had grave misgivings about the dual approach. In the first place, he could not accept the view that all but a few members of the Fund had little or no need of reserves and were not capable of keeping any that they might receive. Secondly, he could see no way to divide the member countries of the Fund in an objective and nondiscriminatory manner “into the reliable few and the less responsible many.”15 The process of balance of payments adjustment by any group of countries could not be governed by pre-set rules. Moreover, even if the second part of a dual package, namely, what was termed the set-aside for countries excluded from the reserve creation itself, seemed to be generous, any attempt to divide the countries of the world into separate groups would be bitterly resented and could bring grave damage to the cause of international cooperation in monetary and economic matters: “One of the outstanding achievements of the past twenty years has been the common commitment of all countries to avoid the destructive beggar-my-neighbor policies prevalent in the 1930s. It would not be wise for the main industrial countries to put in danger the continued observance of international economic regulation.”16
He was, nonetheless, optimistic that new monetary arrangements could be agreed that would satisfy the concerns of those who feared an uncontrolled transfer of resources. But he saw control over the transfer of resources being exercised not by limiting participation in a reserve scheme to an exclusive group of a few industrial countries, but through rules governing the use of the new assets. He noted further that, on the assumption that distribution of new liquidity was in proportion to the size of a country’s quota in the Fund, a universally applied scheme would mean that just over one quarter of the new liquidity would go to the developing countries. The possibility of a long-term transfer of resources was, therefore, small, perhaps no greater than what would be involved in a dual scheme with a set-aside for nonparticipants. Such a set-aside, it had been widely suggested, would also be in the region of one quarter of the total. Accordingly, the Managing Director stated his preference among schemes in these words: “If the choice of a universal rather than dual scheme did increase slightly the risk of a long-term transfer, it would in my opinion be a small price to pay to avoid the political and economic dangers of dividing the free world into two or more groups of countries.”17
Managing Director’s Proposals
This was the background when, in March 1966, the Managing Director sent a note to the Executive Board with a staff paper outlining two plans for reserve creation through the Fund.18 In this note he stated that his proposals had been guided by the general considerations which had governed his approach to the subject of international liquidity. The first was the connection between conditional and unconditional liquidity. There could be no question about the value of conditional liquidity which made reserves available to members on the basis of the steps they took to achieve needed adjustment in their external payments position. At the same time, members wished to have growing amounts of reserves at their disposal in the form of unconditional liquidity. The needs of an expanding world economy would thus require increases in both of these types of liquidity in an appropriate mixture. The Fund already had the task of providing the bulk of conditional liquidity, the amount of which could be adapted periodically through the quinquennial reviews of quotas. The second general consideration was that reserve creation had to be seen as a means to the attainment of objectives to which the Fund’s members attached importance: high employment, economic growth, freedom of international transactions from restrictions, and international payments equilibrium.
The Managing Director outlined two schemes because there was still a considerable divergence of views among the monetary officials of the large industrial countries on the most desirable form for reserve creation. Both schemes built on the techniques explored by the staff the year before, and both were based on the principle that reserve creation was the concern of all Fund members and that all members should participate, with due safeguards, in decisions for reserve creation and in the distribution of the created reserves, with such participation being based on members’ quotas.
Plan I provided for an extension in the Fund of quasi-automatic drawing rights of the gold tranche type. The Fund was to be prepared to waive the limits on its holdings of a member’s currency by the amount of the special reserve facility. Members would be free to decide whether to use the special reserve facility before or after using any part of their regular drawing rights in the Fund. Members would become entitled to participate in any increase in the special reserve facility allocated to them if they granted to the Fund a line of credit equal to the increase.
Plan II was to involve the issuance of reserve units by a new organization, the International Reserve Fund (irf), which would be an affiliate of the Fund in the same sense as the International Finance Corporation (ifc) was an affiliate of the World Bank and membership in which would be open to all Fund members. On the adoption of a decision by the irf to increase reserves, all members of the irf wishing to do so would exchange claims with the irf in accordance with the rules of that institution. Members participating in this exchange would acquire claims on the irf expressed in irf units of a certain weight of gold, and the irf would acquire corresponding claims on its members. The exchange of claims between the irf and participants in the increases in question would be in amounts broadly in proportion to the participants’ quotas in the Fund. On the occasion of any creation of reserve units, participants that had made a net use of the conditional drawing facilities of the Fund would be required to reconstitute those facilities through repurchase up to an amount equal to the new reserve units they received. There could be provisions according to which, by agreement between the Fund and the irf, the allocation of reserve units to a member on the occasion of a reserve increase could be deferred or withheld.
Differences Between the Two Plans
Plan I could be implemented without amendment of the Articles and was based on techniques that the Fund had long used. Plan II, on the other hand, was not designed to fit into the framework of the existing Articles. If established within the Fund without a separation of accounts between regular drawing facilities and the new reserve units, Plan II would involve extensive amendment of the Articles. If established within the Fund with a separation of accounts, Plan II would not involve elaborate amendment, but some amendment would nevertheless be necessary. Plan II would also involve most members in new domestic legislation related to their belonging to the Fund.
A technical difference between drawing rights (Plan I) and reserve units (Plan II) arose from the manner in which reserves were to be transferred. Under Plan I, participants would use reserves in the form of automatic drawing rights in the same way as they already used existing drawing facilities in the Fund, that is, by purchasing foreign currency from the Fund in exchange for their own. By so doing, they would use up an equivalent amount of their automatic drawing rights and create an equivalent addition to the drawing rights of the participants whose currencies were purchased. Drawing rights would thus be effectively transferred from the drawer to the drawee, and the currencies purchased would be used directly, or after conversion, for the settlement of international transactions. Under Plan II, reserves created in the form of reserve units would be utilized by a direct transfer of units from one participant to another. The participant receiving the reserve unit was to provide in exchange its own or some other currency, which, in turn, could then be used for the settlement of international transactions. In brief, under Plan II the transfer of reserves created would take place directly between participants, while under Plan I transfer would be effected indirectly through the Fund.
Similarities in the Two Plans
Under both plans, all participants benefiting from the distribution of additional reserves were to have corresponding obligations to accept transfers of such reserves, whether directly or through the Fund. These obligations were, however, to be limited. In the reserve unit scheme (Plan II), the limits were to be set at, say, three times the cumulative amount of reserves issued to each country, or lower in certain circumstances. In the drawing rights scheme (Plan I), the limits were to be set by the lines of credit which each participant would have to extend to the Fund; these lines of credit were to be provided in the participant’s own currency. Insofar as a participant’s line of credit was drawn upon by the Fund, the participant was to acquire a liquid claim against the Fund which was to be a reserve asset of the same general type as a gold tranche position.
The amount of the line of credit to be given by each participant could be set equal to the cumulative amount of the special reserve facility allocated to it. In that event, the maximum reserve position in the Fund that any participant might be obliged to hold as a consequence of this scheme was to be equal to twice the amounts allocated to it. The obligation to provide financing, that is, to receive transfers, in connection with this scheme could in practice be kept somewhat lower than twice the allocations to a participant because it was envisaged that the resources to meet the Fund’s traditional drawings and drawings on the new facility would be pooled.
In both plans, transfers were to be subject to an element of guidance—in Plan I through the policy of the Fund on the selection of currencies to be drawn, and in Plan II either through general rules to be agreed or through guidance to be applied in particular cases by the Fund. Both plans aimed at avoiding the necessity for participants in balance of payments difficulties to accept transfers from other participants and at bringing about a general proportionality between holdings of the new reserves and other forms of reserves. In the drawing rights scheme (Plan I), the Fund’s repurchase provisions were to apply, but the participant was not to be expected to represent to the Fund that it intended to repurchase within a period of three to five years; this feature of Plan I was similar to the Fund policy then applicable to gold tranche drawings. In the reserve unit scheme (Plan II), the reconstitution of holdings of the new reserve units after use was to be left to the functioning of the transfer mechanism. Under both plans, the reserves created were to be used in the first instance to cancel out any outstanding net indebtedness of the participants concerned resulting from their previous use of the traditional facilities in the Fund.
In both schemes the creation of additional reserves was to be the subject of international decision at intervals of, say, five years, with certain limited possibilities of variation from year to year. It was suggested that decisions would be taken by the Executive Board of the Fund or by the appropriate organ of the affiliate, and that reserves would be created under these decisions when a sufficient proportion of participants able to provide resources to support the reserve creation had agreed to do so.
Meanwhile, as these proposals were being advanced, the staff was making a further study of the characteristics that any reserve assets must possess to assure their acceptability.19
Executive Directors’ Positions
In informal sessions in March and April 1966, the Executive Directors held preliminary discussions on the two plans proposed by the Managing Director. They welcomed the imaginative techniques, noted that it was obviously possible to reproduce within the Fund any scheme that could be decided upon outside the Fund, and found this to be a factor in favor of finding a solution within the Fund.
At one session, Mr. O’Donnell urged that the Fund push on with its studies of the problem of international liquidity and that the Executive Directors continue their discussions with the aim of trying to reach generally acceptable conclusions. He attacked the notion, apparently held by most of the Deputies of the Group of Ten, that participation in any arrangements to create reserves had to be limited to a small group of countries. He objected to the establishment of “a group of ‘second-class’ participants.”
The Directors’ discussions were aimed at clarifying the implications of the two types of reserve creation; therefore, they did not attempt to reach any conclusions as to the desirability of these plans. But many favored Plan I, at least initially, as being easier to institute than Plan II; Plan II, possibly more flexible, might be put into effect later or introduced over time.
In the Annual Report for 1966, some of the details of these proposals were made public.20 Since they had not been acted upon by the Executive Board, they were referred to as proposals of the Managing Director. In the Annual Report it was also noted that alternative provisions could be formulated for a number of features in these proposals and that such alternatives would be considered in further discussions.
Universality Accepted by Group of Ten
Deputies Agree on Some Principles
During the month of May 1966, some of the Deputies of the Group of Ten became less inclined to the dual approach and more receptive to a universal approach. On May 27, 1966 the Economic Counsellor, reporting to the Executive Board on the meeting of the Deputies in Rome on May 17–19, 1966, observed that this meeting was the first at which the suggestion of a universal distribution of reserve units had been favorably commented upon by a number of Deputies. In the Deputies’ report that was being prepared, the need for any reserves that would be created to be distributed to all countries was likely to be a central theme, and the problem of the form of reserve creation, previously paramount, would be presented as a subsidiary question.
Several Executive Directors queried the nature of the change in the Deputies’ thinking. Had not the Group of Ten in effect recognized the universality of reserve needs earlier, even with the dual approach? Mr. Southard, Acting Chairman of the Board, explained that it now seemed likely that the Deputies’ report would contain a well-balanced presentation of various possible schemes of reserve creation, including the two Fund plans. This careful balance had not been so certain a few weeks earlier.
When the Deputies’ report was released on August 25, 1966—timed as in previous years to coincide with the release to the public of the Fund’s Annual Report—the point was made in Chapter 3 (paragraph 42) that any plans for reserve creation should be either in the Fund or closely associated with it. The report contained an extensive discussion of the various plans for reserve creation and (in the annex) a description of the individual plans.21
Although the Deputies did not have a fully developed contingency plan, they had achieved a consensus on certain basic principles for the creation of reserves. First, deliberate reserve creation should be neither geared nor directed to financing the payments deficits of individual countries. Rather, it should take place on the basis of a collective judgment of the reserve needs of the world as a whole, for a certain period ahead, without any attempt to counteract the world cyclical conditions by the adjustment of reserve creation. Second, deliberate reserve creation should consist of unconditional liquidity to be made available to all members of the Fund. Third, although all countries had a legitimate interest in the adequacy of international reserves, a group of major countries with a key role in the functioning of the international monetary system had a particular responsibility for the financial backing for any reserve assets that were created. Consequently, whatever process of decision making was established should reflect, on the one hand, the interest of all countries in the smooth working of the monetary system and, on the other, the special responsibility of the major industrial countries.
No Consensus by Deputies on Other Questions
The Deputies had still not resolved other issues, however. One unsettled question was the long-standing one of the need to meet any deficiency in the world’s supply of liquidity versus the need to improve the process of balance of payments adjustment. This question had been debated since 1963, but as yet there was no real meeting of minds. Multilateral surveillance for the European countries had come to mean, essentially, first the provision through the bis to Working Party 3 of the oecd of detailed information on how balance of payments deficits were financed and then discussions in that Working Party of particular cases of disequilibrium. Such discussions, however, had not so far culminated in the adoption of specific recommendations either for deficit or for surplus countries.
Nor had the special study of balance of payments adjustment by Working Party 3 produced the results hoped for. The advocates of that study had thought that Working Party 3 might adopt rules for some automatic link between movements in reserves and financial policies, similar to that which had prevailed under the classic gold standard. For example, the supply of money in any country, after allowance for the expansion required for the normal increase in real national income, would spontaneously rise or fall with external surpluses or deficits, and then monetary authorities would have to offset the inflationary consequences of what were regarded as “excess changes in the money supply” by the use of nonmonetary policies, particularly of fiscal policies.
Most members of Working Party 3, however, had been unable to adopt this type of multilateral surveillance because they regarded it as too mechanical and as an impairment of central bank autonomy. They preferred a system in which situations of imbalance would be considered on their merits and remedies applied that followed certain guidelines. In the report of Working Party 3 of August 1966, therefore, three typical situations were distinguished and appropriate action was recommended for each situation. But even these conclusions did not meet with enthusiastic response.
When the Deputies dealt with the question of balance of payments adjustment in their report of August 1966, they put forward various possible ways to link reserve creation to measures to correct balance of payments disequilibria. Most of these ways involved placing conditions on the use of new reserve units. Some Deputies went so far as to suggest that reserve units could be transferable only if accompanied by transfers of gold, so that countries in deficit would have an incentive to correct their disequilibria. Another suggestion was that countries in the Group of Ten agree on some kind of “harmonization” in the composition of their reserves, that is, that they reach some understanding on the proportions of their total reserves to be held in gold and in dollars. This suggestion had also been made by a number of Governors at the 1965 Annual Meeting. A third suggestion was that countries with drawings outstanding in the Fund’s credit tranches immediately use their allocation of new reserve units to repurchase their currencies from the Fund. Yet another idea was that there should be rules limiting the “average net use” of new reserves.
Distinction Between Contingency Planning and Activation
The closest link between reserve creation and improvement of the adjustment process lay in still another principle expressed in the Deputies’ report of August 1966. This was that activation of any plan—that is, the first actual creation of reserves, as distinguished from contingency planning—should not be undertaken until a separate and new decision had been taken that there was a clear need for reserves and that certain additional conditions had been fulfilled.
The possible activation of any reserve plan had emerged as an important issue. It was clearer now than it had been a year earlier that any plan for reserve creation was likely to be put into operation very soon after it was worked out. In short, the planning was for a contingency that was almost certain to arise, and in the words of Mr. Frederick L. Deming, Under Secretary of the U.S. Treasury for Monetary Affairs, the pertinent question was not if the plan would be activated but when.22
Expectation that any reserve plan would have to be activated reflected the slower rate of increase in world reserves in 1966 and the fact that the increase that was taking place was itself drawn from special and reversible sources—for example, from the transfer into reserves early in 1966 of the proceeds of what had been a second line of reserves held in U.S. securities by the British Government.
At the same time, those who were concerned about inflationary pressures, and who therefore wanted to delay actual creation of reserves, had much to support their concern. For many industrial countries, the expansionary forces of 1965 became inflationary pressures in 1966. While both private investment and public sector expenditure were advancing sharply in almost all the industrial countries, only France, Italy, and Japan had had a significant margin of unutilized economic capacity at the beginning of 1966. This conjuncture of demand forces exerted growing pressure, in the industrial countries other than France, Italy, and Japan, on financial markets, on interest rates, and on prices.
Moreover, in dealing with these inflationary pressures, most industrial countries either delayed fiscal action or employed it only moderately, placing emphasis on monetary policy. The heavy use of monetary policy instruments was not very successful in reducing payments disequilibrium or in inducing equilibrating capital flows. As a result, those who were most disturbed by the continuing imbalances in international payments began to stress the need for a clear distinction between contingency planning and activation of any new plan.
Meeting at Ministerial Level
At their meeting in The Hague on July 25 and 26, 1966, in which Mr. Schweitzer took part, the Ministers and Governors of the Group of Ten did not seem to feel that it was urgent to formulate a specific contingency plan. They expressed the hope that Working Party 3 of the oecd would continue its work and repeated their earlier agreement that, while there was currently no general reserve shortage, existing reserves might have to be supplemented in the future.23
Nonetheless, some progress had been made. At the ministerial level, as at the deputy level, the Group of Ten achieved a consensus on several of the basic principles of a liquidity plan. With the exception of one delegation, the Ministers and Governors agreed with their Deputies on the need to distinguish between the establishment of a contingency plan and its activation. They further agreed that the prerequisites for activation should include the attainment of better balance of payments equilibrium by all participants in the scheme and the likelihood of a better working of the adjustment process in the future. They agreed that decisions on the activation of any contingency plan and decisions to be taken later regarding reserve creation would recognize that, while all countries had an interest in the smooth working of the international monetary system, the responsibility for providing a substantial part of the financial strength behind any new asset would fall on a limited group. In effect, they had come around to accepting a universal scheme. To reconcile the interests of all with the special responsibility of a limited group, the Ministers and Governors further concluded that proposals for reserve creation should be considered both by the limited group and by the Fund.
Thus, while a few officials continued to reiterate, during the next several months, their partiality for a limited approach to reserve creation, the issue of universality was no longer a matter of major disagreement, and other issues, such as the characteristics that any new reserve asset should have, became primary.
Reasons for Acceptance of Universal Scheme
A number of reasons for the Group of Ten’s change in attitude from favoring a limited approach to acceptance of the idea of a universal scheme can be identified. The critical remarks of the Governors for countries outside the Group of Ten during the 1965 Annual Meeting, the adverse reactions to the dual approach expressed in early 1966 by the Executive Directors for the countries outside the Group of Ten and by the Managing Director, and the formal endorsement of a universal scheme by developing countries as a group—as, for example, in the Unctad report—all had an impact. Undoubtedly, too, some of the countries in the Group of Ten wanted to avoid the political awkwardness of supporting schemes to create money for the large industrial nations only.
There were, as well, difficulties in finding a suitable definition of the countries to be included in a limited scheme. Would countries that were neither industrial nor developing—Australia, for example—be included? Would countries that had particularly close trading and financial affiliations with countries that were part of the limited scheme also be admitted? The latter question concerned especially the members of the overseas sterling area, which were linked to the United Kingdom.
Nor should the Fund’s efforts on behalf of a plan that would include all Fund members be underestimated. Probably most significant in this regard were the several public pronouncements of the Managing Director, who expressed over and over again his firm rejection of anything but a truly universal and international approach.
Possibly the Managing Director’s recitals of the Fund’s experiences persuaded the European countries in the Group of Ten to give up, at least for the time being, the hope for uniform rules for balance of payments adjustment. The possibility that some type of multilateral surveillance could be applied in conjunction with a scheme to create liquidity had been an important motivation for the officials of France and the Federal Republic of Germany, for example, to limit the scheme to the major countries because they were thought to be more likely to adhere to special balance of payments rules. However, Mr. Schweitzer had stressed that the whole experience of the Fund for twenty years bore witness to the dangers of supposing that predetermined rules of balance of payments adjustment could apply to different country circumstances. No two situations were ever identical. But the most important factor facilitating the relinquishment by European authorities of the concepts of multilateral surveillance or close supervision was undoubtedly the safeguard that they suggested for any reserve creation scheme: once the scheme was agreed, it would not be activated until a further mutual decision was taken. In effect, the controversy shifted from the rules to be applied to balance of payments adjustment to the rules to be applied to the use of reserve units and how decisions for reserve creation and activation would be arrived at.
Especially persuasive were the specific proposals made by the Managing Director in March 1966. They provided the Group of Ten with concrete illustrations of how universal liquidity could be created through the Fund. The work of the Fund staff also helped to lay to rest many concerns about the economic and financial consequences of a universal scheme. That the Managing Director’s proposals had been subject to a full exchange of views in the Executive Board was also significant: they could rightfully be regarded as reflecting an international position, as against the position of the few countries composing the Group of Ten.
Widening the Discussions
A Committee of Governors?
The important question of how the actions and discussions of the Group of Ten and of the Fund might be coordinated—that is, how the “second phase” of contingency planning might be implemented—was to occupy the attention of the Executive Board during the next few months before the 1966 Annual Meeting. Although the participation of the representatives of the Managing Director in meetings of the Deputies of the Group of Ten had produced a kind of coordination, there was an emerging view that more formal machinery was required. At a meeting of the Executive Board on May 27, 1966, the Economic Counsellor had reported that the Deputies of the Group of Ten, at their Rome meeting on May 17–19, had begun to give attention to the “second phase” of the deliberations on liquidity, that is, the matter of drawing into the discussions countries other than those of the Group of Ten. The Deputies had given some consideration to the possibility that the Governors of the Fund, at the Annual Meeting in September, might appoint a special advisory committee. This committee could be asked to work out a specific plan for deliberate reserve creation for subsequent decision by the Board of Governors.
Executive Directors’ Reactions
Many Executive Directors expressed concern about the implications of a special advisory committee of Governors. Accordingly, the Executive Board held three informal sessions in June and July 1966 to discuss how the second phase of the deliberations on liquidity might be implemented. At the first of these sessions the Chairman outlined three possible alternatives: (1) the whole matter of liquidity could be referred to the Fund’s Executive Board for consideration and report to the Board of Governors; (2) parallel consideration in the Executive Board and in the Deputies of the Group of Ten could continue; and (3) the Board of Governors could refer the matter to a special committee.
Although he considered the first alternative as the most satisfactory, Mr. Schweitzer did not himself think that it was likely to come about. The second alternative did not represent much of a forward step. Therefore, he saw some merit in the third alternative. As one possible variant of this third alternative, the U.S. authorities had come up with a specific proposal for a committee of 20 Governors. Another possibility, which he tended to favor, was a committee to advise the Board of Governors that would consist of all of the individual Executive Directors of the Fund plus the Deputies of the Group of Ten—in effect a merger into a single committee of the Executive Directors and the Deputies.
Several Executive Directors for countries not in the Group of Ten—e.g., Messrs. Escobar, Nikoi, and Tejera-París—had strong reservations about adding to the discussions another limited group of countries. Many countries would still be excluded. The subject matter being considered was clearly the province of the Executive Board of the Fund. On the other hand, Mr. O’Donnell welcomed the proposals for a second phase, which would broaden the base of the discussions before the countries of the Group of Ten had reached a firm position.
The Executive Directors for the countries in the Group of Ten spoke only in their personal, not in their official, capacities. They argued that any solution had to be practicable and feasible. Mr. Sergio Siglienti (Italy) noted the progress that had been made toward bringing the Fund and the Group of Ten closer together and commended the efforts made by the Managing Director and by the staff. Since these efforts had been inspired by the ideas being expressed by the Executive Directors, the Board had played a more important part in what had been achieved than some Executive Directors took credit for. The problem now was to find a way to recognize formally the role that the Board should continue to play. Mr. René Larre (France) did not favor the U.S. proposal for a committee of Governors. While the Managing Director’s proposal for a joint committee of the Executive Directors and the Deputies of the Group of Ten required more reflection, he was concerned that the countries of the Group of Ten would have double representation. Mr. Horst Ungerer (Federal Republic of Germany, Alternate to Mr. Ernst vom Hofe, Federal Republic of Germany) had other problems with the U.S. proposal: How would the limited number of countries not in the Group of Ten be chosen? What would be the link between the committee of Governors and the Executive Board?
Joint Meetings Suggested
Mr. Emminger, as chairman of the Deputies of the Group of Ten, after sounding out the views of the other Deputies, proposed in July 1966 in a letter to the Managing Director that joint meetings of the Deputies and the Executive Directors be held, with the aim of reaching a consensus on arrangements for creating liquidity. Shortly thereafter, the Executive Directors considered a reply to this letter in two informal sessions. On the understanding that Executive Directors would participate fully and that there would be a free exchange of documents, most Directors were in favor of the joint meetings and asked Mr. Schweitzer to talk informally with Mr. Emminger about how they might be conducted. This he did when he attended the meeting of the Ministers and Central Bank Governors of the Group of Ten in The Hague on July 25–26.
In September 1966, the Managing Director again endeavored to obtain the support of the Executive Board for a draft resolution to be presented to the Board of Governors at the Annual Meeting. Such a resolution would, in effect, ask the Executive Directors to proceed with their work on liquidity and indicate that such work would include joint meetings with the Deputies. Although such a resolution was not legally necessary, Mr. Schweitzer believed that its passage by the Governors would focus attention on the role that the Fund had been playing, and would continue to play, in the field of international liquidity. Envisaging the possibility that the Ministers and Governors of the Group of Ten might take the occasion of the Annual Meeting to reiterate their views and recommendations on this subject, the Managing Director did not think it would be advisable for the Board of Governors to remain silent. It proved difficult, however, to obtain a text that commanded the general support of the Executive Board, and Mr. Schweitzer once more decided not to press for a resolution.
At the Twenty-First Annual Meeting, which was held in Washington from September 26 to 30, 1966, the Managing Director expressed the view that there were no technical reasons why concentrated work could not provide the Governors with fully developed suggestions for arrangements for reserve creation in time for the next Annual Meeting, and that informal meetings between the Executive Directors of the Fund and the Deputies would help the work along.24 Several Governors, especially those for Canada, the United Kingdom, and the United States, urged that specific proposals be ready for the next Annual Meeting and welcomed the idea of joint informal meetings.25 Mr. Schweitzer replied that he was confident that the Executive Directors stood ready to consult with other groups where this promised to be productive and said that arrangements for informal meetings with the Deputies of the Group of Ten were being discussed.26
Mr. Gold was also the Director of the Legal Department and Mr. Polak the Director of the Research and Statistics Department. The latter department, when the Bureau of Statistics was formed on May 1, 1968, was renamed the Research Department, which had been its name before May 1, 1955.
See Chap. 14 below.
Statement by the Governor of the Fund and the World Bank for Australia, Summary Proceedings, 1965, pp. 79 and 80.
“Zehner-Gruppe und Reform des Weltwährungssystems,” Deutsche Bundesbank, Auszüge aus Presseartikeln, January 26, 1966, pp. 1–6.
With the exception of the classification used in International Financial Statistics, which was somewhat different, the Fund used the following classification of members plus Switzerland in its statistics during the period covered by this history:
Industrial countries: Austria, Belgium, Canada, Denmark, France, the Federal Republic of Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States.
Primary producing countries in more developed areas: Australia, Finland, Greece, Iceland, Ireland, Malta, New Zealand, Portugal, South Africa, Spain, Turkey, and Yugoslavia.
Primary producing countries in less developed areas: all other members.
Annual Report, 1966, pp. 83–88 and 105–11.
The report, entitled International Monetary Issues and the Developing Countries, was published by the United Nations as UN document TD/B/32 and TD/B/C.3/6, New York, 1965. The members of the group originally appointed were V. S. Alkhimov, Head, Foreign Currency Department, Ministry of Foreign Trade of the U.S.S.R.; Gamani Corea, Permanent Secretary, Ministry of National Planning and Economic Affairs, Ceylon; Octavio A. Dias Carneiro, formerly Chief of Economic Department of the Foreign Ministry, Brazil; Jorge González del Valle, Alternate Executive Director, International Monetary Fund; Julius Hájek, Director of the Foreign Exchange Department of the Ministry of Finance, Czechoslovakia, and Associate Member of the Prague Research Institute of Finance; Lord Kahn, Fellow of King’s College and Professor of Economics in the University of Cambridge, England; Amon Nikoi, Executive Director, International Monetary Fund; I. G. Patel, Chief Economic Adviser, Ministry of Finance, India; Pierre Sanner, Director of Studies, Banque Centrale des Etats de l’Afrique de l’Ouest; Tibor Scitovsky, Professor of Economics, University of California; and T. W. Swan, Professor of Economics, Research School of Social Sciences, Australian National University. Owing to the inability of I. G. Patel to be present throughout the group’s meetings, K. N. Raj, Professor of Monetary Economics, Delhi School of Economics, University of Delhi, was appointed as an additional member.
UN General Assembly Resolution (International Monetary Reform) 2208 (XXI), December 17, 1966.
The four officials were Alexandre Kafka (Brazil), Javier Márquez (Mexico), Geoffrey Maynard (United Kingdom), and Victor L. Urquidi (Mexico).
UN document TD/B/75, par. 3, May 31, 1966.
The study was later published in the Appendix to International Reserves: Needs and Availability, papers and proceedings of a seminar at the Fund (Washington, 1970), pp. 369–422.
Annual Report, 1966, pp. 12–14.
Address at Ecosoc, February 24, 1966. Published in Supplement to International Financial News Survey, Vol. 18 (1966), pp. 65–68. Reference is to p. 68.
Speech published in Supplement to International Financial News Survey, Vol. 18 (1966), pp. 141–44.
Ibid., p. 143.
Ibid., p. 144.
The two plans, and some supplementary notes that were circulated later in the month, are published below, Vol. II, pp. 3–7 and 8–14. The plans, presented as Part I and Part II of the staff paper, are referred to in the discussion here as Plan I and Plan II.
J. Marcus Fleming, “Use and Acceptance of Reserve Claims,” Staff Papers, Vol. 13 (1966), pp. 443–52.
Annual Report, 1966, pp. 18–20.
Group of Ten, Communiqué of Ministers and Governors and Report of Deputies ([Frankfurt], 1966). The report was transmitted to the Ministers and Governors on July 8, 1966 and released on August 25, 1966. The communiqué was issued at the conclusion of the Ministers’ and Governors’ meeting on July 25–26, 1966 in The Hague. See also International Financial News Survey, Vol. 18 (1966), pp. 245–46 and 285–86.
Remarks at the Third International Investment Symposium, Boston, Massachusetts; see U.S. Treasury Department, Press Release, July 14, 1966, p. 13.
Communiqué of the ministerial meeting of the Group of Ten; cited above in footnote 21 of this chapter.
Opening Address by the Managing Director, Summary Proceedings, 1966, pp. 19 and 20.
Statements by the Governor of the Fund and the World Bank for Canada, the Governor of the Fund for the United Kingdom, and the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1966, pp. 33–34, 61, and 113.
Concluding Remarks by the Managing Director, Summary Proceedings, 1966, p. 209.