Chapter 5: Progress Toward a Plan for Reserve Creation (October 1, 1966–April 15, 1967)
- International Monetary Fund
- Published Date:
- February 1996
Discussions on Reserve Creation entered their fourth year. This year proved to be one of tremendous, and eventually fruitful, activity. The most appropriate way for the Group of Ten to confer with representatives of other countries—often referred to as the second phase of the deliberations—was found to be joint meetings of Executive Directors of the Fund and Deputies of the Group of Ten. Four such meetings were held between November 1966 and June 1967. The Managing Director also had consultations with the Secretary-General of the Unctad, Mr. Raul Prebisch, and in March 1967 an Executive Board seminar was held with members of the secretariat of that organization in order to give the developing countries an opportunity to express their special concerns about reserve creation.
In addition to their joint meetings, the Executive Directors and the Deputies met separately to consider questions coming up in the joint meetings. From November 1966 to the middle of August 1967 the Executive Directors held more than three dozen informal sessions on liquidity. Also, early in 1967 officials of the six member countries of the eec—Belgium, France, the Federal Republic of Germany, Italy, Luxembourg, and the Netherlands—met at both the technical and the ministerial level to try to reach a unified position on a plan.
For most of the year, prospects for agreement on a specific plan seemed as dim as ever. As late as April 1967 the officials of the Group of Ten still held widely differing views on most of the key issues. From May to the end of August, however, efforts were enhanced to reach agreement on some plan and events moved swiftly. The principal points of a plan were thus worked out so that at the Twenty-Second Annual Meeting, in Rio de Janeiro late in September 1967, the Board of Governors had before it for approval an “Outline of a Facility Based on Special Drawing Rights in the Fund.” On September 29, 1967, the significant step was taken: the Board of Governors adopted a resolution instructing the Executive Directors to convert the Outline into a legal instrument in the form of amendments to the Fund’s Articles of Agreement.
These developments are described in detail in this and the following chapter. The present chapter recounts what happened until the middle of April 1967, when the members of the eec came to an understanding among themselves, an achievement which gave impetus to agreement among the Group of Ten. Chapter 6 explains how the features of the Outline emerged during the following five and a half months, culminating in adoption of the resolution at the Annual Meeting in Rio de Janeiro in September.
Arrangements for Joint Meetings
Joint meetings between the Executive Directors and the Deputies of the Group of Ten were without precedent. Before the meetings were agreed, several questions had to be resolved to allay the fears of those Directors who were especially exercised lest the Fund’s role in any such discussions be underplayed.
At the meeting of the Finance Ministers and Central Bank Governors of the Group of Ten on September 25, 1966, the Managing Director had explained the views and attitudes of Executive Directors for several countries that were not in the Group of Ten. He drew the attention of the Ministers and Governors to the fact that the Executive Board had been able to produce a unanimous section on international liquidity in the Fund’s Annual Report for 1966. In his opinion, this indicated that the views of the financial officials of the countries outside the Group of Ten were not radically different from the views of the officials of the countries in the Group. He stressed, however, that what did concern the members of the Fund that were not in the Group was their role in the process by which broad agreement was to be reached on any new measures for creating liquidity. The members of the Fund that were not part of the Group were unwilling to be assigned a secondary role in negotiations affecting the monetary system for the whole world. In the view of the Executive Directors for these countries, subordinate participation was not justified by the economic behavior of the countries concerned: a large percentage of the non-industrial countries had been striving continuously and successfully to maintain sound and convertible currencies and to build up their reserves to reasonable working levels.
Mr. Schweitzer explained that countries outside the Group of Ten accepted the Fund’s system of weighted voting—which gave most of the votes to the countries in the Group of Ten—because all members had a fair and adequate opportunity for group discussion and decision. These members regarded with dismay anything that disturbed the unity of the Fund because they saw in such a development their relegation to a status in which they would not enjoy, as a right, a due voice in international debate. Their fears were intensified when language was used, procedures followed, and proposals made that appeared to pay less than adequate regard to their interests.
The concerns of the Executive Directors for countries that were not in the Group of Ten regarding their participation in the discussions going on were again made evident in October 1966 when, following his informal talks with Mr. Emminger, the Managing Director discussed with the Executive Directors the form of the forthcoming joint meetings. The meetings were to be informal and would not take on the character of a session of the Executive Board. The first meeting would be held in Washington on November 28 and 29, 1966, and subsequent meetings would be held alternately in Washington and outside the United States. All meetings would be under the joint chairmanship of the Managing Director and the chairman of the Deputies. The chairmen would confer throughout the meetings on the conduct of the meetings, but the Managing Director would preside at meetings in Washington and the chairman of the Deputies at meetings outside Washington. Executive Directors, Alternate Executive Directors, the Deputies of the Finance Ministers and Central Bank Governors of the Group of Ten (two Deputies for each country), and their alternates would attend the joint meetings, together with the Managing Director, the Deputy Managing Director, and some senior officials of the Fund staff. Observers from the Swiss Government, the bis, and the oecd would also be invited. The Secretary of the Fund would prepare an informal record similar to the Secretary’s journal of informal sessions of the Executive Board.
Many Executive Directors still questioned the proposed arrangements. Did not the procedures imply that the Group of Ten, a limited group, was placing itself on the same level as the Fund, an international body? Should not the Executive Directors maintain their position by insisting that the chair should be held by the Chairman of the Executive Board, and that all joint meetings should be held at the Fund’s headquarters and conform to the normal procedures of the Fund? Should not the Executive Directors have similar discussions with other agencies, such as the Unctad and the Inter-American Committee on the Alliance for Progress (ciap)?
The Managing Director replied that the purpose of the joint meetings was, essentially, to advance international agreement on ways to create liquidity. The only purpose of his proposals on procedures was to have some practical arrangements for moving the discussions forward. The arrangements should not be construed as being a meeting of the Executive Board, in its capacity as the legal organ of the Fund, with the Deputies of the Group of Ten, in the manner of a meeting of two international institutions, each having to safeguard its international status. What he was proposing was, in effect, that the Executive Directors should meet as individuals, informally, with other individuals who were Deputies of the Ministers and Governors of the Group of Ten, in order to exchange views.
As to the place of meeting, it was a matter of courtesy to the Deputies to alternate meetings between Washington and Europe since the Deputies were busy in their home countries at other jobs while the Executive Directors devoted full time to these matters. Regarding the question of chairmanship, joint chairmanship was preferable to alternating the chairmanship between the Managing Director of the Fund and the Chairman of the Deputies, which had initially been suggested by the Deputies.
After further talks with Mr. Emminger about the arrangements, Mr. Schweitzer returned to the Executive Board on October 19, 1966 and explained that it was not feasible to modify the arrangements outlined above. He ascertained that the Executive Board was willing to proceed on that basis. Messrs. Schweitzer and Emminger then worked out the physical arrangements—dates, hours, agenda, size of delegations, simultaneous interpretation from French to English and from English to French, record keeping, and seating arrangements. The Deputies approved the arrangements made by Mr. Emminger on November 16, 1966 (in Paris), and on November 23, 1966 the Executive Directors in informal session agreed to the arrangements made by the Managing Director.
Before the first joint meeting with the Deputies, the Executive Directors held several informal sessions to consider the broad questions on which the discussions at the joint meetings were to focus. Also, in order to be in a position to present the views of the developing members of the Fund more effectively at the prospective joint meetings, the nine Executive Directors elected by developing members began in the latter months of 1966 to meet informally among themselves as a “G-9 Caucus,” or “Group of Nine.”
The informal sessions held by the Executive Directors as a whole revealed both the nature of the questions concerning reserve creation that remained outstanding and the opinions of individual Executive Directors. Many of the attitudes expressed, especially by the Executive Directors for the countries in the Group of Ten, were similar to the positions that had been, and were being, taken by representatives of those countries in Group of Ten meetings. These questions were considered: (1) What should be the purpose of reserve creation? (2) What form—reserve units or drawing rights in the Fund—should deliberately created reserves take? (3) Should countries already indebted to the Fund be obliged to use their new reserves in the first instance to pay off their Fund obligations? (4) What conditions should govern the transfer of the new reserves? (5) How should reserve creation be financed?
At this juncture, a clarification is necessary about the terminology used in the discussions of reserve creation in this chapter and in Chapter 6. The eec countries, especially France, preferring to regard any new mechanism for creating liquidity as a credit arrangement rather than a means of providing a new form of reserve, regarded the concept of a “reserve asset” as unacceptable. In formal negotiations, therefore, such as meetings at the ministerial level or even in some of the discussions at the joint meetings between Executive Directors and the Deputies, monetary officials, when seeking a term to designate a new reserve—which could be in the form either of a drawing right or of a reserve unit—or when describing the ways in which a possible new mechanism for reserve creation might work, rarely used the term reserve asset. They used instead the more general terms reserve creation and deliberately created reserves. Nevertheless, the term reserve asset was singularly useful in discussions among technicians and was commonly used not only by the Fund staff but also by the Executive Directors in their informal discussions. Hence, in reporting here the discussions that took place within the Fund, the term reserve asset is often used, while in reporting discussions within the Group of Ten, or in joint meetings between the Deputies and Executive Directors, the terms reserve creation and deliberately created reserves are used.
Purpose of Reserve Creation Discussed
Based on Global Need
Consensus seemed to have been reached by the latter part of 1966 regarding the purpose of reserve creation. The purpose was to supply additional liquidity to the world economy as and when needed: the global need for reserves was to be provided for. In view of all the discussions that had been going on thus far as to whether reserve creation was, or was not, necessary for the monetary system, most agreement about the purpose of reserve creation was really in negative terms—that is, what its purpose was not to be. It was agreed, in particular, that the purpose of reserve creation should not be to provide countries with a means of financing balance of payments deficits, nor with a means of financing economic development.
By this time, it was also the accepted view that the global need for reserves should be assessed for a period of some three to five years ahead. It had been realized gradually that it would not be possible to alter world liquidity in accordance with changes in the business cycle in the same way that central banks managed short-term changes in the supply of domestic liquidity. The idea, current a few years earlier, that world reserve policy might be used to iron out short-term fluctuations in the world business cycle had been abandoned. The greatest risk that an inadequate amount of world reserves might present to the international economy was no longer regarded as the risk of deflation and unemployment but rather the risk of widespread restrictions on international trade and capital movements and a decreased willingness on the part of creditor countries to give aid to developing countries.
The staff reported to the Executive Board that the Deputies of the Group of Ten saw as an additional purpose of reserve creation that a specific plan for enhancing world liquidity would help to establish confidence in the entire international monetary system. Once the major countries had agreed on a plan, the excessive disappearance of gold into private hoards might stop and it might be unnecessary actually to create as many reserves as the then existing rate of gold hoarding might suggest were needed.
Relation to Conditional Liquidity
Despite their general agreement on the purpose of reserve creation, the Executive Directors, in their informal discussions, brought up a number of questions relating to the need for reserves and how that need would be determined. Mr. Anjaria wished to know how global, or universal, needs for reserves would be defined. What exactly was meant by reserve creation being adapted to the world’s need for liquidity? Mr. Alexandre Kafka (Brazil) stressed the insistence of Latin American officials that all countries, not only the economically big ones, could and should assume responsibility for the financial backing of any new reserve asset. Mr. Lieftinck raised a question that he was to bring up frequently in later discussions: What was the relationship between the need for new reserves and the amount of, or need for, conditional liquidity in the traditional form of larger quotas in the Fund? More specifically, how would one judge whether it was the creation of new reserves or an increase in members’ quotas in the Fund that was necessary?
Mr. Lieftinck explained his position. He found the reasoning in the report of the Deputies of the Group of Ten not very convincing. They had been fearful that any creation of reserves would be dangerous: these reserves might be misused and have undesirable repercussions on the world economy. Consequently, suggestions for establishing safeguards had crept into their proposals. They had even gone so far as to distinguish between a limited group, which would set its own safeguards and standards, and countries not in the Group of Ten, for whom the Group of Ten would probably also set safeguards. Indeed, the Deputies had suggested some built-in safeguards against overuse of the new reserves in the form of minimum and maximum limits on the holdings of new reserves, a reference to the harmonizing of reserve ratios that had come up in the Group of Ten’s discussions in 1965–66 when the prospect of agreeing on other methods of enforcing discipline seemed remote.
It was Mr. Lieftinck’s view that the logical conclusion of this philosophy of subjecting the use of a new reserve asset to rules would come very close to what the Fund was already doing. The Fund did exercise discipline over the use of its resources. Was not the solution to the need for augmenting world liquidity, therefore, an increase in conditional liquidity, that is, increases in Fund quotas? In his opinion, the problem of the relationship between conditional and unconditional liquidity should be further explored.
Mr. Jorge González del Valle (Guatemala) supported Mr. Lieftinck’s view that the advantages of any scheme for creating a special reserve over the simpler and better-known procedure of increases in Fund quotas should be studied closely. In this context, he referred to the Declaration of Jamaica, in which the Governors of the central banks of Latin America had urged that the role of the Fund be strengthened, among other ways, through a more dynamic procedure for revising and adjusting quotas and through more flexible access to the Fund’s resources, including an increase in unconditional drawing rights.1 He also emphasized that the Fund’s policies for providing conditional liquidity could be improved so as to strengthen the process of balance of payments adjustment. Such an improvement could reduce the need for additional reserves or for reserve creation.
Mr. Adolfo C. Diz (Argentina) pointed to a number of important problems concerning the timing of reserve creation. There were likely to be substantial delays between the recognition of a need to create reserves and the time when reserves were created, and between the time when reserves were created and the time when the effects of the reserve creation were felt.
Relation to Development Finance
In the discussions concerning the purpose of creating a reserve asset, it was inevitable that the question of the link with development finance, which had come up frequently in past discussions of reserve creation, would be raised again.
Mr. Faber pointed out that, for developing countries, the main benefit of reserve creation was a speeding up of their rate of development, not the maintenance of external payments equilibrium. For developing countries, reserves not only served the long-term need of financing development but were essential in the short term to enable development programs to be continued during times of emergency. Mr. Larre agreed with Mr. Faber that the developing countries were not being offered much by the various schemes that were to be considered at the joint meetings, and suggested that the Executive Directors hold joint meetings with the Unctad also.
Mr. Dale gave two reasons why the U.S. authorities were inclined to think that there should not be a link between reserve creation and development finance. First, the questions concerning deliberate reserve creation were sufficiently complex without bringing in considerations of development aid. Second, were such a link to be effected, the U.S. Congress might well reduce the amounts of other foreign aid programs; hence, the developing countries might not achieve any net gain from linking development aid to reserve creation.
In Mr. Dale’s view, the question of the relationship between development aid and reserve creation was in the process of being resolved satisfactorily. He recalled that initially some monetary authorities had held the view, first advanced by Mr. Stamp, that only the developing countries should receive new reserve assets, although these reserve assets would later be earned by industrial countries. An opposing group had taken the position that new reserve assets should go wholly to the industrial countries, and that there should be no permanent transfer of resources to the developing countries. At a second stage of the discussions, both of these positions had been softened. The group advocating reserve assets only for developing countries had moved to the position that all countries should participate in the initial distribution. The group advocating reserve assets only for industrial nations had proposed what had been called a dual approach: new reserves would be distributed to a limited number of countries but, in addition, a certain amount of resources would be set aside, possibly through the International Development Association or through the Fund, from which assistance or additional drawing rights might be made available to countries not participating in the scheme. The third stage of the discussions had now been reached. A universal approach, involving creation of an identical reserve asset for all countries, had been accepted, in effect overcoming the problem of linking reserve creation and development financing.
Form of Deliberately Created Reserves Considered
When the Executive Directors moved on to the matter of the form that the deliberately created reserves might take, the Economic Counsellor first reviewed for them the ways in which the views of the Deputies of the Group of Ten on the various proposals for reserve creation had evolved. Originally the Group of Ten had had before it the Bernstein plan and the French proposal, both of which were schemes to create reserve units (CRUs) and were entirely limited to the Group of Ten. During the next three years those delegations of the Group of Ten that favored any reserve creation at all had indicated a preference for some kind of reserve unit, such as the CRU. The Belgian delegation had consistently favored some method of reserve creation through the Fund.
As the Deputies had come to the realization that something would have to be done for the countries not in the Group of Ten, they had attempted to make certain that the new reserves that these countries would receive were as good as the units to be distributed to the Group of Ten. There had been a shift by several Deputies away from the idea of reserve units for some countries and a different sort of reserve for others, say, drawing rights in the Fund, toward the idea of reserve units for all. The latter had been, of course, the concept behind the Fund’s Plan II.2
There were a number of differences between the schemes put forward by various delegations at the Deputies’ meetings during 1966 and the Fund’s Plan II; but these differences were in the area either of the process of decision making or of arrangements for making good any losses should the scheme be liquidated. More specifically, Canada, Japan, and the United Kingdom within the Group of Ten favored reserve units for all, but this view had not yet been accepted by most members of the eec; Belgium, for example, had a preference for drawing rights, as in the Fund’s Plan I. For a long time the U.S. position had been, in effect, to support both kinds of reserve asset, under a combined drawing rights-reserve unit scheme.
Mr. S. J. Handfield-Jones (Canada) and Mr. J. M. Stevens, later Sir John (United Kingdom), confirmed that their Governments were in favor of a scheme based on reserve units rather than one based on drawing rights. Reserve units seemed to be endowed with more of the qualities of money and to satisfy better the motives that induced countries to hold owned reserves. Thus, reserve units would be more effective than drawing rights in sustaining confidence in the new reserves. Moreover, reserve units were more clearly distinguishable from existing drawing rights in the Fund than some kind of unconditional drawing rights would be, and therefore ran less risk of impairing the Fund’s normal standards of conditionality. In addition, while some countries were treating their traditional drawing rights in the Fund as part of their reserves, others were not; hence, there was still a need to get the world at large to regard drawing rights in the Fund as part of reserves.
As he had on other occasions, Mr. André van Campenhout (Belgium) remained in favor of drawing rights. His argument was based in part on the Fund’s long experience with drawing rights and in part on the idea that a drawing rights scheme was better adapted for maintaining a proper balance between conditional and unconditional liquidity. He endorsed Mr. Lieftinck’s comments in favor of doing as much as possible through conditional liquidity. Mr. vom Hofe saw merit in the idea that had been suggested by the Managing Director of starting with drawing rights and shifting to reserve units later on. Mr. Siglienti and Mr. Otto Schelin (Denmark, Alternate to Mr. Kurt Eklöf, Sweden) confirmed that the positions of their countries on the question of drawing rights or reserve units were flexible.
Taking the line again of doing more through conditional liquidity, Mr. Lieftinck contended that the choice between reserve units and drawing rights was too restricted. Although the Managing Director’s proposals for creating reserves had contained suggestions for setting up an affiliate organization of the Fund, he preferred to see a solution that would incorporate reserve creation into the existing mechanism of the Fund. More attention ought to be paid, for example, to ways to augment reserves that involved increases in Fund quotas. It might be possible, for instance, to link the creation of reserve units to the gold payments due in connection with quota increases. Possibly there could be quota increases without members making gold payments. Or members might use reserve units to pay the required gold subscriptions.
Mr. Larre, stating that he understood from the staff that there was no substantial difference between the schemes for reserve units and those for drawing rights, questioned whether this was actually so. In line with the French view that what was being discussed was not a new reserve but a new form of credit, Mr. Larre referred to “creditor countries.” He explained why he thought that, from the viewpoint of the creditor country, the schemes for drawing rights might be significantly different from those for reserve units. Under a drawing rights scheme, the creditor country would presumably be consulted when its currency was to be drawn; it could therefore object to the drawing on balance of payments grounds. Under a reserve unit scheme, the creditor would not normally have an option to object.
The Economic Counsellor replied that it was possible to make the two types of scheme identical. One of the reasons why reserve unit schemes were preferred by some officials was that they were envisaged as being devoid of “guidance,” that is, suggestions (presumably from the Fund) as to which currencies should be made available when a participant presented reserve units for conversion. He himself, however, could not imagine a scheme that would not involve at least some guidance; a member needing to encash reserve units would have to be able to turn to some organization to nominate a recipient that would exchange convertible currency for reserve units. Schemes involving drawing rights were based on arrangements already in operation that provided such guidance. Hence, differences in regard to guidance were not inherent in the two kinds of scheme.
Question of Compulsory Reconstitution
Another difficult question that was still unresolved late in 1966 concerned the compulsory reconstitution of credit tranche positions in the Fund. Should countries that were indebted to the Fund—that is, members whose currencies were held by the Fund in amounts equivalent to more than 100 per cent of their quotas—be obliged to use newly distributed reserves to repurchase from the Fund before they could make any other use of them? When the Executive Directors discussed this question in informal session prior to their first joint meeting with the Deputies, the staff presented two arguments for compulsory reconstitution of Fund positions. First, countries that were indebted to the Fund could be considered the least entitled to obtain new freely available drawing rights or reserve units. Second, a provision requiring reconstitution of Fund positions was a more effective and permanent way of achieving one of the conditions sought by the Deputies of the Group of Ten for activation of any plan. One of the main reasons for delaying activation until certain conditions were fulfilled was a desire not to make new reserve units available to countries whose currencies were held as reserves so long as they were still running balance of payments deficits. Making activation of a contingency plan dependent on the absence of balance of payments deficits in a few key countries, however, was not, in the staff’s opinion, a good solution. Presumably, even after activation, most countries, including reserve currency countries, would from time to time incur balance of payments deficits. Compulsory reconstitution would solve the problem of relating reserve creation to the elimination of balance of payments deficits by use of a general provision which was not directed in particular toward countries that were reserve centers but which would apply to any country that had already drawn on the Fund.
The positions expressed by the Executive Directors on the question of compulsory reconstitution suggested that this issue was going to be a bristly one, and so it did later prove to be. Mr. Dale said that the U.S. authorities had recently come to believe that the notion of compulsory reconstitution of credit tranche positions in the Fund required further thought. Initially the U.S. authorities had favored a version of this provision because there had been concern over the extent to which a distribution of new reserve assets beyond a limited group might give rise to transfers of real resources. For several reasons, however, the U.S. attitude on this question was changing. One, the focus of the discussions had shifted from international liquidity toward reserves; the mechanism now being discussed was for the purpose of creating reserves, that is, unconditional liquidity rather than conditional liquidity. The effect of requiring reconstitution of members’ positions in the Fund was to make the new liquidity conditional rather than unconditional. Two, the U.S. view was that reserve creation should not be related to a country’s balance of payments position; but requiring reconstitution of a credit tranche position involved relating the type of liquidity a country would gain from the new mechanism to its past balance of payments position. Three, many countries that were indebted to the Fund might be indebted also to other creditors. Why should the debts to the Fund be singled out for reconstitution or repayment?
In contrast to Mr. Dale’s position questioning the concept of compulsory reconstitution was the position of some of the European Executive Directors. Messrs. vom Hofe, van Campenhout, and Lieftinck all definitely preferred the idea of compulsory reconstitution of Fund credit tranche positions with the new reserves. Hence, the staff was asked to study carefully the relationship between the provision for compulsory reconstitution in a reserve creation plan and the automatic repurchase obligations of Article V, Section 7, of the Fund Agreement.
Question of Use and Transfer of a New Reserve
Another question still to be answered concerned the conditions that would govern the use and transfer of a new reserve. The Deputies of the Group of Ten, especially in the Ossola Group, had already devoted much attention to the rules of transfer for any reserve asset. Nonetheless, by November 1966 the characteristics to be given to a new reserve asset regarding its usability and transferability remained one of the most controversial of the unsettled issues. Determining these characteristics had been difficult, partly because very technical subjects were involved and many alternative suggestions had been advanced, but also because the characteristics attached to any new reserve asset involved the relation of the reserve asset to gold. Some officials emphatically did not want the new reserve asset to supplant gold or even to resemble gold. At the same time, the issue was an important one because the characteristics attached to a new reserve asset greatly affected its acceptability as a reserve.
At an informal session of the Executive Directors early in November 1966, Mr. Fleming, who had attended meetings of the Ossola Group, summarized the thinking thus far. Two points concerning the transferability and usability of a reserve asset had already been established. First, the freedom to transfer and to use reserve assets was dependent on the existence of firm obligations by participants in the reserve-creating scheme to accept them in exchange for convertible currency. Second, participants’ willingness to accept and hold reserve assets must substantially exceed the amount in existence.
The issue that had been prominent earlier, in 1964–65 when the Ossola Group was meeting—whether transfers of reserve units would take place directly between participants or indirectly through some intermediary—was no longer vital. The crucial question now was the degree of freedom that should govern transfers. Should use of a reserve unit be determined only at the discretion of the participant holding the unit, or should the participant have to present a case that it had a need to use it? Would a participant making a transfer of units be free to decide to which other participant it would pass the units? How could the desire of the transferor for maximum freedom of use be reconciled with the desire of the transferee for protection from an undue accumulation of reserve units?
Mr. Fleming explained that in the early stages of the discussions on liquidity it had been suggested, as in the cru proposals, that both the occasion for use of reserve units and the direction of transfer would be predetermined by fixing uniform ratios between a participant’s holdings of reserve units and its total reserves. Participants would be able to transfer reserve units only in accordance with pre-set ratios between their holdings of the new units and their holdings of reserves in other forms, such as gold and foreign exchange. Later on, the inclination of the officials of the Group of Ten had been to favor giving maximum freedom to the transferor, both as to the occasion of use and as to the direction of transfer. Now, the Group was leaning toward limitations on both use and transfer so as to provide safeguards for the transferees.
At the end of November 1966, the Deputies of the Group of Ten set up a Working Party on Provisions to Ensure Acceptability of a New Reserve Asset, also under the chairmanship of Mr. Ossola, to study further the conditions governing use and transfer of a new reserve.3 Mr. Fleming, who attended meetings of this Working Party, again reported to the Executive Directors in January 1967. The views of the Deputies were still not sufficiently definitive. While some attention was being given to the characteristics that would make the new reserve asset “like gold,” this approach had not provided much guidance on what characteristics were actually to be given to a new reserve asset, especially as no one was in favor of making the asset convertible into gold. Three main viewpoints were being expressed, with many subvariants, combinations, and refinements.
One view still favored a gold-transfer ratio approach: transfers of reserve units would be made in some proportion to the gold holdings of the transferring country. A second favored fairly free transferability, but with certain provisos: the transfer should not be intended to change the composition of total reserves, and limits should be established on the obligations of countries to hold reserve units that were transferred to them, limits that might be two or three times the amounts of reserve units originally distributed to them. A third view favored provisions essentially similar to those which governed the Fund’s transactions and which had been suggested by the Managing Director in the proposals he had put forward in March 1966. Transfer would be free, subject to balance of payments need. The direction of transfer would be guided by an agent, although possibly in a rather loose way—for example, by setting up a list of participants to which transfers should not be made and other lists of participants to which they would be permitted or encouraged. There would be holding limits and possibly reconstitution obligations. There was also a view held by some that the transferee would best be safeguarded by making the reserve unit so attractive that participants would not worry about how many they received.
The view of the staff was that at least a moral check on the use of new reserves ought to be set up by confining their use to situations of clear-cut balance of payments need. Also, the staff preferred a form of transferability that would be subject to some degree of guidance: there would be an attempt to steer the transfer of reserve units away from countries that were in payments difficulties and toward countries that had payments surpluses, or that had a smaller ratio of the reserve units to total reserves than the general average of other countries.
Messrs. Stevens, vom Hofe, and Lieftinck all stated that the new reserve unit must be “as good as gold.” Therefore, its use ought to be made as free as possible. But it might not be feasible to make it fully usable until it had become accepted in international financial transactions. Hence, more guidance and control might be needed at the outset than would be necessary later. Mr. Lieftinck stressed the need for the new unit to have a gold-value guarantee, to bear interest, and to be usable in reconstituting credit tranche positions in the Fund. He also favored transfers through the Fund, at least in the initial phases, as this would help to establish an orderly and controlled market for the new reserves.
Also in January 1967, the Executive Directors considered a staff paper on how participants might use new reserve units in their transactions with the Fund. It was apparent that much more thought would have to be given to the nature of reserve units and how they would be used and transferred. Nearly all of the Executive Directors voiced concern that the Fund might become loaded down with new units and become illiquid.
Financing of Reserve Creation
When informal discussions by the Executive Directors on how reserve creation should be financed got under way in November 1966, the Economic Counsellor reported that the term financing of reserve creation was a relatively new one. There was not likely to be any problem of financing when the new reserves were initially distributed. Reserves would be distributed to all participants, presumably all Fund members, and, although some consideration had been given to the possibility that a participant would “opt out” of the scheme, it might be assumed that normally all participants would accept the new reserves allocated to them rather than forgo them. Moreover, the total amount of reserves to be created would also have been determined before distribution.
The problem of financing would arise after the initial distribution, when some participants would want to reduce their holdings of the new reserves in order to finance a balance of payments deficit. The new reserves would then move to other participants according to the rules that would have been established for accepting and holding them. The basic question, therefore, concerned which participants were likely to be on the receiving end and in what amounts.
Staff studies had revealed that, contrary to initial impressions, the desire of the Fund’s members to increase their reserves in the long run included not only the industrial countries but the developing countries as well. There was consequently no reason to presume that, over a sufficiently long period, any particular group of countries was likely to absorb most of the new reserves. Accordingly, the rules for accepting the new reserves could, from the beginning of the scheme, be based on the principle of universality, that is, that additional reserves would be absorbed by all participants that had reasonably strong balance of payments and reserve positions.
Mr. Kafka thought that the question of financing reserve creation centered on the nature of the economic burden involved. There were, he noted, three ways in which reserve creation might become a burden to the countries that found themselves accepting created reserves in payment of goods and services. The first was that they might be called upon to deliver so-called vehicle currencies, or other reserves (such as gold) that could be transformed into usable currencies. The second was that countries might be called upon to make permanent transfers of real resources. The third way in which reserve creation might become a burden was that, even if there were no permanent transfers of resources, it was conceivable that a rapid expenditure of the new reserves might lead to worldwide inflation. As a result, after several years the new reserves would have lost purchasing power. The countries that had received them initially would, after a time, be transferring them in exchange for goods and services at much higher prices; in turn, countries earning reserves later on through surpluses would be achieving such surpluses at relatively inflated prices. Thus, because of the gradual loss of value of the new reserves via the inflation process, there would be a real burden involved for those countries that had earned and held reserves at an earlier time.
Mr. Larre thought of the financing problem in terms of the balance and liquidity of a scheme, that is, in terms of the arrangements needed to ensure that the scheme would not break down. How was any scheme to be made financially sound? If countries were willing to make open-ended commitments as to what they would accept as a line of credit or as reserve units, then there could be a scheme with foolproof stability and liquidity. If there were limitations on the commitments of participants, then there was a risk of illiquidity. Since countries did want some limits on their commitments to accept deliberately created reserves, clearly there was a problem as to how to make the scheme work.
Mr. Siglienti would avoid using the term burden. It was difficult not only to identify the burden of any liquidity scheme, but even to define what was meant by that term. The discussions in the Group of Ten and in the Fund had shown that the deficit countries were somewhat more eager than the surplus countries to find a solution to the liquidity problem; this had led to the notion that the debtors would find a solution for their deficits through the creation of liquidity and the creditors would bear the burden. One had to assume that there would be no excess creation of any new liquidity instrument. Otherwise, the surplus countries would have to engage, unwillingly, in a transfer of real resources. Surplus countries wanted to protect themselves. Because no acceptable objective criteria were available as to what amount of reserves to create, these countries wished to have a major influence in any decisions relating to the creation of new reserves.
Mr. O’Donnell emphasized that the pattern of surpluses and deficits was continuously changing; hence, the so-called burden was likely to be a shifting one. He also believed that, if one really wanted to tie the new reserve unit closely to gold, the straightforward way to do it would be to increase the price of gold. Indeed, raising the price of gold would obviate the need for any new reserve asset. In the absence of this simple solution, much time and attention had to be devoted to discussing ways to introduce a new reserve asset, and how to give it features that made it “as good as gold” or “like gold.”
The informal discussions of the Executive Directors on the question of financing reserve creation clarified the point that the question of backing for any new reserve instrument, another question frequently coming up, basically involved the provisions required to liquidate any reserve-creating scheme. At the time any scheme might be ended, the new units would have to be turned in for something, that is, for whatever backing these new units had. Presumably, the countries with the strongest currencies would have to provide such backing, which was another reason why the major industrial countries believed that they needed a major voice in any decisions concerning the amount of new reserves to be created.
First Joint Meeting
The first of the four joint meetings on reserve creation between Executive Directors and the Deputies of the Group of Ten was held in Washington on November 28, 29, and 30, 1966, immediately following the informal discussions of the Executive Directors described above. In addition to the participants and observers (see Table 1, pages 134–37 below), there was a secretariat made up of two members of the Fund staff and three persons from the Group of Ten, one of the latter being a member of the Fund’s Office in Europe who had been temporarily assigned to assist the Deputies.4
|INTERNATIONAL MONETARY FUND|
|Pierre-Paul Schweitzer, Managing Director (1,2)|
|Frank A. Southard, Jr., Deputy Managing Director (1)|
|Executive Directors and Alternates2||Constituency3|
|J.J. Anjaria (1,2)||India|
|Arun K. Banerji (1,2)|
|William B. Dale (1,2)||United States|
|John S. Hooker (1,2)|
|Adolfo C. Diz (1)||Argentina, Bolivia, Chile, Ecuador, Paraguay, Uruguay|
|Yamandú S. Patrón (2)|
|Paul L. Faber (1,2)||Burundi, Guinea, Kenya, Liberia, Malawi, Mali, Nigeria, Sierra Leone, Sudan, Tanzania, Trinidad and Tobago, Uganda, Zambia|
|Torben Friis (1,2)||Denmark, Finland, Iceland, Norway, Sweden|
|Jorma Aranko (1,2)|
|Jorge González del Valle (1,2)||Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Venezuela|
|Alfredo Phillips O. (1,2)|
|S.J. Handfield-Jones (1,2)||Canada, Guyana, Ireland, Jamaica|
|Patrick M. Reid (1,2)|
|Alexandre Kafka (1)||Brazil, Colombia, Dominican Republic, Haiti, Panama, Peru|
|Paulo H. Pereira Lira (1,2)|
|René Larre (1,2)||France|
|Gérard M. Teyssier (1,2)|
|Pieter Lieftinck (1,2)||Cyprus, Israel, Netherlands, Yugoslavia|
|H.M.H.A. van der Valk (1,2)|
|Amon Nikoi (1,2)||Algeria, Ghana, Laos, Libyan Arab Republic, Malaysia, Morocco, Singapore, Tunisia|
|M.W. O’Donnell (1,2)||Australia, New Zealand, South Africa|
|A.M. de Villiers (1,2)|
|J.O. Stone (2)4|
|Sergio Siglienti (1,2)||Greece, Italy, Portugal, Spain|
|Costa P. Caranicas (1,2)|
|J.M. Stevens (1,2)||United Kingdom|
|Douglas W. G. Wass (1,2)|
|Hideo Suzuki (1,2)||Burma, Ceylon, Japan, Nepal, Thailand|
|Eiji Ozaki (1,2)|
|Beue Tann (1)||Republic of China, Korea, Viet-Nam|
|Chi-Ling Chow (1,2)|
|André van Campenhout (1,2)||Austria, Belgium, Luxembourg, Turkey|
|Herman Biron (1,2)|
|Ernst vom Hofe (1,2)||Federal Republic of Germany|
|Horst Ungerer (1,2)|
|Antoine W. Yaméogo (1,2)||Cameroon, Central African Republic, Chad, Dahomey, Gabon, Ivory Coast, Malagasy Republic, Mauritania, Niger, People’s Republic of the Congo, Rwanda, Senegal, Togo, Upper Volta, Zaïre|
|Léon M. Rajaobelina (1,2)|
|Joseph Gold, The General Counsel (1,2)|
|J.J. Polak, The Economic Counsellor (1,2)|
|Roman L. Home, Secretary of the Fund (1)|
|W. Lawrence Hebbard, Secretary of the Fund (2)|
|Jean-Paul Sallé, Director, Office in Europe (1,2)|
|J. Marcus Fleming, Deputy Director, Research and Statistics Department (1,2)|
|George Nicoletopoulos, Deputy General Counsel (1,2)|
|GROUP OF TEN|
|Cecil de Strycker, Director, National Bank of Belgium (1,2)||Jacques Mertens de Wilmars, Adviser to the Board, National Bank of Belgium (1,2)|
|Marcel D’Haeze, Director of the Treasury and Public Debt, Ministry of Finance (1,2)||R. van der Branden, Belgian Financial Adviser to Organization for Economic Cooperation and Development (2)|
|A.B. Hockin, Assistant Deputy Minister of Finance, Department of Finance (1,2)||W.A. Kennett, Adviser, Department of Finance (1,2)|
|R.W. Lawson, Deputy Governor, Bank of Canada (1,2)||W.C. Hood, Adviser, Bank of Canada (1,2)|
|Maurice Pérouse, Director of Treasury, Ministry of Economy and Finance (1,2)||Pierre Esteva, Secretary General, National Council of Credit (2)|
|Pierre Esteva, Secretary General, National Council of Credit (1)||Daniel Deguen, Assistant Director of Treasury, Ministry of Economy and Finance (1,2)|
|B. Clappier, Deputy Governor, Bank of France (2)|
|FEDERAL REPUBLIC OF GERMANY|
|Otmar Emminger, Member, Board of Directors, Deutsche Bundesbank (1,2)||Wolfgang Rieke, Division Chief, Deutsche Bundesbank (1,2)|
|Rolf Gocht, Assistant Secretary, Ministry of Economic Affairs (1,2)||Lore Fuenfgelt, Division Chief, Ministry of Economic Affairs (1,2)|
|Rinaldo Ossola, Director of the International Economics Research Department, Bank of Italy (1,2)||Silvano Montanaro, International Economics Research Department, Bank of Italy (1)|
|L. Fronzoni, Representative in Brussels, Bank of Italy (2)|
|Giorgio Rota, Chief Inspector, Ministry of the Treasury (1,2)||Florio Gradi, Representative in United States, Italian Exchange Office (1)|
|E. Valle, Representative in Paris, Bank of Italy (2)|
|Yusuke Kashiwagi, Director, International Finance Bureau, Ministry of Finance (1,2)||Keijiro Tanaka, Chief, International Organizations Section, International Finance Bureau, Ministry of Finance (1,2)|
|Haruo Mayekawa, Executive Director, Bank of Japan (1,2)||Daizo Hoshino, Adviser, Bank of Japan (1,2)|
|E. van Lennep, Treasurer General, Ministry of Finance (1,2)||D.M.N. van Wensveen, Head, International Monetary Affairs Department, Ministry of Finance (1,2)|
|G.A. Kessler, Managing Director, Netherlands Bank (1,2)||Baron A.W.R. MacKay, Deputy Director, Netherlands Bank (1,2)|
|Sven F. Joge, Deputy Governor, Sveriges Riksbank (1,2)||A. Lindå, Head of Division, Sveriges Riksbank (1,2)|
|L. Klackenberg, Counsellor, Ministry of Finance (2)|
|Sir Denis Rickett, Second Secretary of the Treasury (1,2)||D.F. Hubback, H.M. Treasury (1)|
|L.P. Thompson-McCausland, H.M. Treasury (2)|
|C.J. Morse, Executive Director, Bank of England (1,2)||C.W. McMahon, Adviser to the Governors, Bank of England (1,2)|
|Frederick L. Deming, Under Secretary of the Treasury for Monetary Affairs (1,2)||George H. Willis, Deputy to the Assistant Secretary for International Monetary Affairs (1,2)|
|J. Dewey Daane, Member, Board of Governors of the Federal Reserve System (1,2)||Robert Solomon, Adviser to Board of Governors of the Federal Reserve System (1,2)|
|M. Iklé, Managing Director, Swiss National Bank (1,2)||J. Lademann, Director, Swiss National Bank (1,2)|
|Jean Cottier, Deputy Secretary General, Organization for Economic Cooperation and Development (1,2)||S. Marris, Organization for Economic Cooperation and Development (1,2)|
|Milton Gilbert, Economic Adviser, Bank for International Settlements (1,2)|
First meeting, November 28–30, 1966, Washington; second meeting, January 25–26, 1967, London. The numbers in parentheses indicate which of the two meetings the individual attended.
Alternate Executive Directors, always appointed by the Executive Director, are indicated by italic type.
Only 19 of the 20 constituencies that appointed or elected Executive Directors were represented at the joint meetings because neither Mr. Ahmed Zaki Saad (Egypt) nor his Alternate, Mr. Albert Mansour (Egypt), attended. See also Chap. 30, p. 626.
Mr. Stone was Executive Director elect when he attended the second meeting.
Not including two persons who served as members of the secretariat.
First meeting, November 28–30, 1966, Washington; second meeting, January 25–26, 1967, London. The numbers in parentheses indicate which of the two meetings the individual attended.
Alternate Executive Directors, always appointed by the Executive Director, are indicated by italic type.
Only 19 of the 20 constituencies that appointed or elected Executive Directors were represented at the joint meetings because neither Mr. Ahmed Zaki Saad (Egypt) nor his Alternate, Mr. Albert Mansour (Egypt), attended. See also Chap. 30, p. 626.
Mr. Stone was Executive Director elect when he attended the second meeting.
Not including two persons who served as members of the secretariat.
At the first joint meeting, the ground covered was much the same as that covered by the Executive Directors in their informal sessions: (1) the aims of reserve creation, especially the need for reserves and its relationship to policies for balance of payments adjustment and to the supply of conditional liquidity; (2) the nature and form of deliberately created reserves, especially the choice among (a) reserve units for all, (b) Fund drawing rights for all, and (c) reserve units for a limited group and Fund drawing rights for others; (3) the distribution of deliberately created reserves, with emphasis on the criterion to be used for distribution and the question of requiring participants to reconstitute their use of conditional drawing rights in the Fund with newly distributed reserves; (4) the utilization of new reserve assets, including conditions for the transfer of and for assuring the acceptance of these assets; and (5) the conditions and circumstances for the activation of a contingency plan.
The meeting revealed that important differences of opinion on most of these issues persisted. There was much more discussion than had been anticipated by the Executive Directors on the question of the need for reserves. At the outset of the meeting, Mr. Maurice Pérouse (France) reiterated the position that the French authorities had been taking right along. The most important requirement of the international monetary system was restoring equilibrium to the balance of payments of the reserve currency countries. Creating reserves would not solve any basic problem because there was no immediate unsatisfied need for reserves. He referred to the view held by some that there was currently an excess supply of world reserves and that it was doubtful that a shortage would arise in the foreseeable future. Mr. Pérouse stressed that the French authorities would, accordingly, give greatest attention to what measures were being proposed to improve the machinery for balance of payments adjustment. Plans for creation of liquidity were secondary.
Mr. Cecil de Strycker (Belgium), Mr. van Lennep (Netherlands), and Mr. Ossola (Italy) took moderate positions on this point but nonetheless made it clear that the creation of an unconditional reserve asset must not undermine international monetary stability. There had to be assurance that countries would observe the rules of monetary discipline and that if they had external deficits they would adopt the necessary adjustment processes. In effect, what was under consideration was how to determine in quantitative and qualitative terms when, and in what amounts, new reserves would be created and how to define with precision the conditions that would apply to the use of new reserves.
Addressing himself to the point that Mr. Lieftinck had so often raised, that the Deputies’ report had laid stress on unconditional rather than on conditional liquidity, Mr. Emminger explained that, following the increase in Fund quotas in 1965, the Deputies had considered the supply of conditional liquidity sufficient. He also pointed out many of the difficulties that would be involved in recognizing the existence of a world shortage of reserves and, therefore, the precise time when activation of a contingency plan would be needed.
Little agreement existed on the type of new reserves to be created. Significantly, Mr. Deming and Mr. J. Dewey Daane (both of the United States) and Mr. van Lennep and Mr. Kessler (both of the Netherlands) took a position that they had not taken before—in favor of reserve units for all countries. This position had been expressed previously by the Japanese, the Canadian, and the British participants in Group of Ten meetings, and they restated it in the first joint meeting. Nonetheless, many Deputies continued to think that the rules for use of any reserve unit might be differentiated between groups of countries: industrial countries might be subject to different rules than developing countries. Moreover, only what might be considered as negative progress was made concerning the criterion by which a new reserve might be distributed: that is, any alternative to the use of quotas in the Fund as a criterion did not gain much support.
There was considerable discussion about the character of any new reserve asset, that is, about how it might be made “like gold.” Several suggestions were put forward to link the new unit closely with gold and traditional reserves, such as through the “harmonization of reserve ratios.” This concept involved instituting procedures whereby new reserve assets would be used and held in a ratio to total reserve holdings similar for all participants. Another principle being evolved was that participants would not use their new reserves to alter the composition of their total reserve holdings. Both of these ideas were aimed at avoiding the possibility that some participants would unload their new reserves in order to switch into traditional reserve forms at the expense of other participants who would then be obliged to hold excessive amounts of the new form of reserve.
Because of these areas of difference, the first joint meeting ended with most of the basic questions still unanswered.
From the outset, however, the joint meetings were considered useful. Immediately after the first one, Mr. Handfield-Jones, for instance, noted that the participants had buried the suspicions and mistrusts which had previously existed between the Deputies of the Group of Ten and the Executive Directors and that this type of unity made negotiations possible. Mr. Anjaria commented that one of the discoveries, at least for those countries not in the Group of Ten, had been that the countries of the Group of Ten were not, by any means, a solid phalanx. Like the Executive Directors, the Deputies were struggling to find a solution that would command maximum acceptance.
Making some observations to the Executive Directors about the first joint meeting, the Economic Counsellor said that contrary to what many had anticipated, the physical size of the meeting had not proved to be a handicap—or at least not more so than the usual separate meetings of the Executive Board or of the Deputies—and that the meeting had disproved the proposition, often expressed, that no progress could be made in the larger group so long as no agreement had been reached in a smaller one. Mr. Emminger similarly expressed his satisfaction with the meeting.
This atmosphere of friendly, informal interchange continued through the other three joint meetings.
Question of Decision Making
The most difficult and sensitive question in the entire debate had not yet been discussed: How should decisions be made for the entry into force of any liquidity scheme and for the creation and recall of new reserve assets?
Fund Staff Suggests Some Voting Arrangements
By late in 1966 it had become apparent that the eec countries were concerned that they would not have a great enough influence in the decisions that would have to be taken in the Fund affecting the supply of world liquidity. In particular, they believed that they required special voting arrangements to protect them from the possibility that participants with large payments deficits, such as the United Kingdom and the United States, might outvote them in a new reserve arrangement. At the same time, the authorities of the United Kingdom and the United States had come to a recognition of what was being referred to as a fact of life—that the Six had become economically very powerful.
These considerations lay behind a statement by the staff to the Executive Directors regarding illustrative voting provisions when the Directors explored the voting question in informal sessions in January 1967, before the second joint meeting. Each participant in an affiliate agency of the Fund would have a quota proportional to, or equal to, its quota in the Fund. That quota could serve as the basis for distributing the new reserves, for specifying the limits, if any, on the obligations to accept a transfer of new reserves from other members, and for voting.
The staff went on to suggest that a majority of 85 per cent of the voting power represented by these total quotas could reasonably be required for the entry into force of any reserve creation scheme that was decided on and a majority of 80 per cent for the actual periodic creation of reserves that would subsequently take place. The rationale of these percentages was as follows. For a liquidity plan to enter into force, significant action had to be taken, such as amending the Fund’s Articles of Agreement. Hence it appeared advisable to make certain that entry into force was accepted by virtually all members. It was also desirable to ensure that most of the large countries potentially in surplus as well as a high proportion of all members of the Fund would participate in the new scheme. Therefore, for the new scheme to take effect it did not seem unreasonable to require a participation representing as much as 85 per cent of total quotas.
The figure of 80 per cent for actual reserve creation, once the scheme had entered into force, corresponded to the majority applicable to decisions to change Fund quotas that was provided in Article III, Section 2, of the existing Articles. A second factor in favor of the 80 per cent figure was that this majority would make it likely that reserve creation would have the support not only of the total number of participants but also of the majority of the large participants that had balance of payments surpluses, and that any decision to recall or cancel reserves that had previously been created would have the support not only of participants in general but also of the majority of participants in balance of payments deficit.
The staff described two techniques whereby the influence of the participants that were, at any time, creditors under the scheme could be enhanced. There could be adjusted weighted voting, similar to that in Article XII, Section 5 (b), of the existing Articles. Voting in the affiliate could be adjusted, for example, on the basis of the difference between participants’ actual holdings of new reserve assets and the total they had received in distributions. Participants that had accumulated reserve assets would thus have more voice than other participants in the decision-making process. Account could be taken not only of creditor, but also of debtor, positions. The second technique by which creditors could be protected was by a provision for “opting out” from a specified distribution under the scheme. Such a right could be given to a participant which dissented from any particular decision to create reserves.
In the belief that the need for reserve creation should be reviewed at regular intervals, the staff suggested an interval of every five years. In this way, the need for reserve creation would be reviewed at the same time as the need for a general increase in Fund quotas was being reviewed.
The significance of the percentages suggested by the staff was underscored in a statement by Mr. Handfield-Jones showing how he had calculated possible alternative distributions of votes. The figures suggested by the staff meant that, under the then existing division of voting power in the Fund, the eec, when voting as a group, would have a veto over the entry into force of a new liquidity mechanism but not over subsequent reserve creation. The voting power in the Board of Governors of the eec countries, taken together, made up 16.8 per cent of the total on November 30, 1966. Mr. Handfield-Jones called attention to the two opposing principles that were involved in deciding what majority should be required for the approval of a proposal to create reserves. On the one hand, deliberate creation of reserves was a sufficiently serious matter to require a large measure of international agreement; unpalatable decisions should not be imposed on important groups of countries. On the other hand, one would not wish to paralyze the ability of the international community to act by giving a veto to every individual member or to an unduly small aggregate of the votes. These opposing principles left only a limited range of compromise. Mr. Handfield-Jones suspected that 80 per cent would be regarded as the minimum, and he doubted whether any figure above 85 per cent would be widely accepted, even if agreement could be reached that the 80 per cent currently required by the Fund’s Articles for quota increases could be higher.
As the Executive Directors considered the process of decision making, it was evident that, in addition to the questions concerning the size of the majorities required for the acceptance of any liquidity scheme and for subsequent reserve creation, and whether and how weighted voting should be adjusted for creditor-debtor positions, a number of other questions concerning voting techniques would have to be answered. Should there be basic votes, equivalent to the existing basic votes in the Fund of 250 votes per country? Should the distribution of votes be based on Fund quotas alone, or should commitments under the General Arrangements to Borrow also be included, as was recommended by some Executive Directors? Should there be split voting, with votes cast on a country-by-country basis, as was done when the Governors voted on quotas, or should there be bloc voting, as was done when the Executive Directors voted, casting the total votes of all the countries that elected them? Split voting would present problems for the Executive Directors who were elected by several countries. It would also give each country a possible veto over activation of the plan or over subsequent reserve creation, and it was contrary to the customary weighted voting used in the Fund’s normal operations. A further question was whether, if an opting out technique was introduced, a country should lose some votes, that is, those pertaining to a particular distribution of reserve units, when it did opt out.
Arguments in Favor of High Majorities
The Executive Directors appointed or elected by the countries in the eec argued strongly in favor of the 85 per cent majority for all decisions relating to the new reserve mechanism. Messrs. van Campenhout and Lieftinck saw no logic in requiring one majority for the acceptance of a contingency plan and another for the activation of that plan. The 85 per cent majority should apply to both. Mr. Siglienti also considered that, as the creation of a reserve asset was different from anything the Fund had previously done, a decision-making procedure closely related to the economic power of the different countries was necessary. For example, more account would have to be taken of the levels of trade and reserves and less of national income than presumably was done in calculating Fund quotas. Furthermore, he thought that a high majority for activation was preferable to at least some of the preconditions for activation that had been suggested in various discussions of that topic, and that, in general, the countries that had accumulated the new reserves should have more voice than others in the decision-making process.
Mr. Larre, again expressing France’s concerns about the inflationary impact of deliberate reserve creation, explained at length why the French authorities favored a procedure for decision making that called for the unanimous agreement of all participants before reserves could be created. They believed that any authority which had the power to create money would be under tremendous pressure to do so, and to do so on an extensive scale. Specifically, once the contingency plan had been agreed, there would be great pressure to activate it—pressure from debtor countries and from developing countries. Pressure might even come from the Fund, which would then have this new means of avoiding having to seek increases in more traditional resources from possibly reluctant members. Moreover, there might be pressure from some creditor countries which feared that they might become debtors or which, taking a long view of the international situation, thought that the main threat in the world was not inflation but recession and therefore considered it better to err on the side of excessive, rather than inadequate, money creation.
Further, the French authorities believed that reserve creation in the international sphere would not be controlled by the one limit that sooner or later worked on monetary policy in the domestic sphere, namely, the balance of payments position. Consequently, there was a genuine danger of excessive reserve creation, which would have serious inflationary consequences both for the international economy and for the economies of those countries which were more susceptible to inflationary pressures.
Mr. Larre thought that the way to get around these fears and dangers was to have checks and balances in the decision-making process. Provisions for opting out could not alone give a participant sufficient assurance that the scheme would not damage its national interests because pressure to create new units which would affect that participant could clearly be generated by other participants. The only real safeguard would be to require unanimity in the decision-making process. Unanimity could be a permanent rule under the scheme or it could apply for an initial period until experience with the scheme had been gained. But there might be other ways around these difficulties. For example, because creditors were likely to feel more pressure on their economies from a liquidity scheme than from their quotas in the Fund, more weight in voting under the scheme might be given to creditor positions.
Mr. Larre’s statements also reflected a French view that was beginning to evolve in favor of a scheme based on drawing rights. He said that, although any scheme for creating reserves would tend to be inflationary, a drawing rights scheme was less prone to be inflationary than a reserve unit scheme. Moreover, a scheme that included a gold-transfer ratio, that is, a scheme under which new reserves would be transferred among participants only in some ratio to the participants’ holdings of gold, would not be as inflationary initially as one which did not contain this kind of limitation. Therefore, before the issue of the decision-making process could be decided, agreement had to be reached on what sort of scheme it would apply to.
Mr. O’Donnell thought that there was a case for having an 85 per cent majority for both entry into force of a contingency plan and activation of that plan, and agreed with Mr. Siglienti that a high majority for activation was preferable to at least some of the preconditions that had been suggested.
It was evident that obtaining a meeting of the minds on this issue of voting was going to be unusually difficult. Mr. Saad said several times that he would reject any voting provisions for a new Fund affiliate, or in the Fund itself, that would have the effect of endowing any group of countries with the right to veto any decision. To think in terms of an affiliate of the Fund with special provisions for voting could mean the Fund’s losing its standing in the world. Furthermore, the Fund and any affiliate should not have different provisions for voting. The Fund already provided adequate safeguards for surplus countries.
Several Executive Directors, especially Messrs. Stevens, Kafka, and Nikoi, argued that the crucial element in the decision-making process was the procedure by which proposals to create reserves were to be made. The procedure suggested by the staff was that proposals to create reserves would, after appropriate consultation with participating governments, be made by the Managing Director. These three Directors hoped that consultation procedures could be worked out which would ensure that the Executive Board would have a full opportunity to concur in any proposals that might be made. Mr. O’Donnell made the point that the Managing Director ought to be careful to consult the participants that were likely to have to provide resources in the event of an increase in created reserves, although it was hard to be sure in advance which participants these would be.
Second Joint Meeting
The second joint meeting of Executive Directors and the Deputies of the Group of Ten took place on January 25 and 26, 1967 in London.5 In line with the practice of the Ministers and Governors of the Group of Ten of electing one of their number to serve as chairman, and of rotating that chairmanship, Mr. Callaghan, U.K. Chancellor of the Exchequer, was then chairman of the Group at the ministerial level. At this meeting, some of the same ground that had been covered at the first joint meeting had to be gone over again. Mr. Pérouse emphasized that, in addition to examining plans for reserve creation, the position of gold in the international monetary system and the improvement of international credit facilities ought also to be studied. Nonetheless, in order not to divert attention from developing a reserve plan, the other Deputies and the Executive Directors agreed that the agenda for the meeting should be planned so that there would first be an exchange of views on (1) the conditions and circumstances for activating a contingency plan, (2) the process of decision making, and (3) the possibility of setting up reserve units in the Fund for all countries.
The meeting showed that, although there were still marked differences on certain topics, there appeared to be a growing convergence of opinion on some features of a plan for reserve creation. There was now no dissent from the concept that, if reserve creation took the form of a reserve unit scheme, it would be operated through the Fund, possibly through an affiliate, with the Managing Director of the Fund acting as managing director of the affiliate as well. There was also general recognition that the conditions for activation of a contingency plan could not be defined exactly, either quantitatively or qualitatively. Some discussants thought that an adequate voting requirement for activation would be a sufficient safeguard against premature activation. There was also some support for the idea that the same voting majorities should be used both for activation of the scheme and for subsequent creations of reserves. General agreement appeared to exist as well on the proposition that satisfactory consultation by the Managing Director prior to making proposals for reserve creation would go far to resolve the difficulties involved in decision making.
On the other hand, there was no broad support for any particular contingency plan or for any specific decision-making process. A scheme consisting of reserve units in the Fund was still considered illustrative: it was a technical topic worthy of further exploration. With regard to the decision-making process, positions were preliminary. While the idea of weighted voting, based, for example, on quotas in the Fund, met with general approval, positions differed on a suggestion by Mr. Pérouse that votes be adjusted so as to give more votes to creditors and reduce the votes of debtors. In addition, some of the Deputies from eec countries favored the idea that a participant could choose not to receive an allocation of new units, that is, that it would be possible for a participant to opt out of any distribution decided upon.
Aftermath of First and Second Joint Meetings
The differences of opinion prevailing after these two joint meetings seemed, to the Executive Directors, to revolve mainly around the question whether a plan to create liquidity should be based on reserve units or on drawing rights. Some of the European Directors, especially Mr. Larre, began to express the view that reserve units were, in effect, more like new money or reserves, whereas drawing rights were more analogous to credit, and they tended to favor the latter. Mr. Larre’s position was in line with the resolution that had been adopted by the Finance Ministers of the eec, meeting in The Hague in January 1967. In a development which Mr. Larre called the most important of the early weeks of 1967, the Ministers had agreed among themselves that the Monetary Committee of the eec should, immediately, undertake a thorough exploration of the “credit facilities” that could be obtained within the framework of the Fund.
Hence, Mr. Larre requested that the staff consider more carefully the possibilities of schemes based on the Fund’s traditional methods. Noting that Messrs. Lieftinck and van Campenhout had some time earlier suggested that liquidity creation might be tied to increases in Fund quotas or to a broadening of the automaticity of gold tranche drawings, Mr. Larre asked why the staff had not considered techniques of this type. Had not the Fund, fearful of being overtaken by the Group of Ten, rushed into the study of a new reserve unit without giving equal consideration to the facilities that could be provided within the framework of its own organization? Mr. Lieftinck, discerning what he believed was an increasingly favorable disposition among the countries of the Group of Ten to a drawing rights scheme, likewise requested that the staff examine not only how a reserve unit scheme based in the Fund might work but also how a drawing rights scheme could be devised.
Two detailed plans for creation of liquidity, “Outline of an Illustrative Reserve Unit Scheme” and “Outline of an Illustrative Scheme for a Special Reserve Facility Based on Drawing Rights in the Fund,” were prepared by the staff and circulated to the Executive Directors in February 1967.6 A further paper compared the corresponding provisions of the two illustrative schemes. Both schemes were built on the Managing Director’s proposals of March 1966, which in turn had been based on schemes drafted earlier. Several elaborations had been worked out in order to show how a fully developed scheme would look. The reserve unit scheme, which involved an International Reserve Organization as an affiliate of the Fund, contained illustrative details as to how decisions on the amount and timing of reserve units to be created and distributed would be taken. A mechanism for transferring reserve units among the members of the organization was suggested.
The illustrative drawing rights scheme, as now drafted, represented an attempt to have a scheme comparable in most respects to the illustrative reserve unit scheme. It differed significantly from the Managing Director’s Plan I of March 1966. Plan I had involved an extension into the credit tranches of the quasi-automatic drawing rights that members already enjoyed in the gold tranche. A member would have been able to exercise those rights after it had used its gold tranche and at whatever point it chose until it had exhausted its rights in the credit tranches. No amendment of the Articles of Agreement was involved. In the illustrative drawing rights scheme of February 1967, however, “special drawing rights,” a term now being used in the plans being drafted in the Fund, were to be established, which a member could use at any time regardless of that member’s gold and credit tranche positions. These special drawing rights could be thought of as having a completely floating character, that is, they could be used quite independently of the Fund’s usual drawing rights. They could constitute a separate account within the Fund. Like the reserve unit scheme, the drawing rights scheme now entailed amendment of the Articles.
Executive Directors’ Consideration of Illustrative Schemes
In the next few weeks, the Executive Directors held numerous informal sessions to consider these illustrative schemes. Mr. Larre wanted to discuss only the drawing rights scheme. But many Directors preferred the reserve unit scheme; these included Mr. Dale, Mr. Handfield-Jones, Mr. B. K. Madan (India), Mr. Hideo Suzuki (Japan), and Mr. Douglas W. G. Wass (United Kingdom, Alternate to Mr. Stevens). Some of their reasons were new, others had been mentioned before. Reserve units seemed to have more the quality of international legal tender; they looked more credible as a supplement to, or substitute for, gold. Drawing rights might be construed as a right to borrow or as a simple extension of the existing Fund credit facilities and therefore could not compete with reserve units in being accepted as a new asset. Reserve units could be used directly in transactions between monetary authorities, their transfer not being dependent upon an intermediary agent or upon some method for guiding the transfer. A system of reserve units for unconditional liquidity would be separate from the operation of the Fund system for conditional liquidity, thus providing a clear-cut distinction between conditional and unconditional liquidity.
Because he wanted the reserve units to be as much as possible like legal tender, Mr. Handfield-Jones had difficulties with the transfer arrangements which the staff had proposed for the reserve unit scheme. As he understood it, there was envisaged a system of guided transfers in which one country would transfer units to another country on the advice of the Fund affiliate. Presumably, in giving its advice, this affiliate would draw on the long experience that the Fund had had with the operation of the policy on selection of currencies already governing the Fund’s ordinary drawings. One could not know how such a system would work in practice, however, or whether the Fund’s existing policy on selection of currencies was strong enough to bear the heavy additional burden of serving as a guide to the transfer of a deliberately created international reserve unit. More importantly, by recourse to the principle of guided transfer the opportunity would be missed of endowing the reserve unit with a truly monetary quality. In a drawing rights scheme there must inevitably be guidance, but in a unit scheme there could be something much closer to free transfer and to the quality of legal tender.
Mr. Handfield-Jones therefore circulated his own memorandum suggesting alternative transfer arrangements for a reserve unit scheme. He proposed in effect a flexible version of the concept of linking holdings of the new units to holdings of gold. In the absence of a voluntary transfer arrangement between participants, transfers would be made in such a way that the ratios between the gold holdings and the reserve unit holdings of two participants would tend to be equalized. But, normally, reserve units and gold would be transferred voluntarily.
Other Executive Directors did not favor this proposed link. Mr. van Campenhout repeated his preference for a drawing rights scheme. Several Executive Directors expressed no strong preference for either scheme; these included Mr. Torben Friis (Denmark), Mr. Kafka, Mr. Saad, and Mr. Siglienti.
A number of technical points were discussed during the Executive Directors’ informal sessions. The extent to which the Fund as agent would direct transfers between participants, that is, “guide” transfers, was a point on which there were differences of opinion. On the one hand, the Executive Directors for the United Kingdom, Italy, and the Nordic countries wanted a minimum of guidance and of rules of transfer so as to improve the reserve nature of the new asset. On the other hand, the staff argued that guidance and transfer rules of some kind were necessary in practice to ensure the workability of the new asset. A number of criteria were suggested for transfers, but the staff argued that it was simplest to decide upon transfer practices that were similar to those which the Fund had built up over the years for its policies on regular drawings.
Deputies Discuss Illustrative Schemes
From March 30 to April 1, 1967, a few weeks before the third joint meeting with Executive Directors was scheduled to take place, the Deputies of the Group of Ten met in The Hague, also to discuss these two illustrative schemes. A number of Deputies from eec countries that had previously indicated a preference for reserve units put forward suggestions for drawing rights of a type that closely resembled reserve units in many of their formal characteristics—a similarity already found in the Fund’s illustrative scheme for drawing rights. For example, the new drawing rights would be operated through a special account in the Fund, that is, they would be financed by techniques that separated them from the general resources of the Fund. They would be directly transferable between participants according to rules of use and transfer rather than being transferable via an exchange of currencies through the Fund. These suggestions were received with interest, but without immediate acceptance, both by other Deputies of the Group of Ten who still preferred reserve units and by Deputies from those eec countries that continued to favor drawing rights.
Attempts to Gain Momentum
In March and April 1967, a strong push was made within the Fund and by the United States finally to get agreement on a contingency plan for reserve creation. Moreover, the eec countries seemed to be coming around to agreement on a plan.
In the Fund
As the Deputies of the Group of Ten and the Executive Directors determined their positions on these questions and schemes in the early months of 1967, the Managing Director and Mr. Emminger consulted frequently on the agenda of the forthcoming joint meetings and exchanged information about the thinking of their groups. Meanwhile, as both groups discussed extensively the two illustrative schemes that had been prepared by the Fund staff, the records of several of the informal sessions of the Executive Directors were made available to the Deputies of the Group of Ten and the minutes of some of the meetings of the Deputies were made available to the Executive Directors. The evolution of the thinking of each group was thus familiar to the other.
In order to facilitate agreement on a plan, the General Counsel and the Economic Counsellor in March 1967 suggested to the Managing Director a procedure aimed at a resolution for adoption by the Board of Governors, which was to meet in Rio de Janeiro in September. Such a resolution would instruct the Executive Directors to prepare, in a reasonably short time, a concrete proposal in legal form for member governments to adopt. To get such a resolution ready in time, negotiations on a text would have to be started as soon as possible after the fourth joint meeting of Executive Directors and Deputies, scheduled for Paris in June 1967.
The staff thought that the greatest step forward in this process would be to have a choice made between the two illustrative schemes. It appeared that the scheme for drawing rights had a better chance than that for reserve units of being accepted by the eec, and hence by the other countries in the Group of Ten. If agreement could be reached on an outline for one particular plan before the third joint meeting, to be held in Washington at the end of April 1967, attention could then be devoted to specific features of that plan. Further changes could be made at the fourth joint meeting. The revised plan could then be submitted to the Governors; precise drafting would be reserved until after the Annual Meeting.
Strong U.S. Statement
Addressing the American Bankers Association at Pebble Beach, California, on March 17, 1967, nearly two years after he had suggested an international monetary conference,7 the Secretary of the U.S. Treasury, Mr. Fowler, gave what was regarded by many monetary officials as a tough speech. He was worried about the recession in the world economy and about the slowing down in the growth of world reserves, and he urged immediate agreement on a meaningful liquidity plan so that it could be presented to the Board of Governors in September. The speech was considered tough because, to many, it implied that, in the absence of agreement, the U.S. authorities might take unilateral action, possibly suspending conversion into gold of official dollar balances held abroad. At the time some officials were also concerned that the United States might arrange some kind of “dollar bloc,” that is, enter into bilateral agreements with countries holding large amounts of dollar balances that had not been converting their dollars into gold.
EEC Works Toward a Common Position
The third significant event of March–April 1967 was that the eec countries also seemed to be arriving at a common position. It has already been noted that in January 1967 the Monetary Committee of the eec was assigned the task of studying the possibility of expanding liquidity through the credit facilities of the Fund. In February the French authorities formed a position that combined a possible unified eec position on such credit facilities with a number of suggestions for changes in the existing practices of the Fund. These suggestions involved an increase in the voting power of the eec countries in the Fund through selective increases in the quotas assigned to them and a suggestion that the rules governing voting power in the Fund be changed so as to give more votes to members with creditor positions in the Fund and fewer votes to members with debtor positions.
The French suggestions involved, as well, some changes for the role of gold in the Fund. The dollar, defined in the Articles in terms of the weight of fine gold as of a certain date, would no longer be used to express par values or used as the Fund’s unit of account; instead, some unit defined in terms of a given weight of fine gold would be used. Gold tranche drawings would be made a matter of legal right under the Articles, rather than by Executive Board decision, a suggestion that had already been made several times by the Belgian authorities. The power of the Fund to waive the gold-value guarantee of its assets in case of a uniform proportionate devaluation of member currencies should be abolished. Further suggestions were made so as to strengthen the discipline the Fund applied to countries in deficit. The Fund should emphasize the conditional and temporary character of its financial assistance.
Most of these suggestions for changes in the Fund’s practices involved amending the Articles.
By early in April 1967, the six countries of the eec had not reached agreement either on the plan they would accept or on the conditions they would attach to their willingness to move on any plan. But it was thought that the French authorities might finally agree at the ministerial level to a plan to create unconditional liquidity. They might agree because it appeared that the French authorities were aware that their position—against any reserve plan—ran the risk that other countries would agree on a plan even if France abstained. The alternative suggestions made by France had not found support. The U.S. authorities had not accepted the ideas that the French authorities had proposed for changing the General Arrangements to Borrow as a way to expand international liquidity, and most of the European countries were also against increasing quotas in the Fund until the next quinquennial review.
Meeting in Munich on April 17, 1967, the Finance Ministers of the six countries of the eec approved the recommendations that had been made by the Monetary Committee of the eec.8 That committee had proposed that there be opened in the Fund new automatic drawing rights, with both accounting and financing separated from other drawing rights in the Fund, which would be usable in accordance with well-defined rules drawn up in advance and directly transferable between the monetary authorities of the member countries. Furthermore, when the Fund’s Articles of Agreement were amended to include such new drawing rights, other amendments should be made. Many of these amendments were along the lines of the earlier French suggestions. Conditions attached to drawing rights in the credit tranches should be tightened. The definition of par values and of the Fund’s unit of account should be simplified by retaining only the reference to a weight of fine gold. An 85 per cent voting majority should be required for various decisions in the Fund, particularly those for general changes in quotas and for the creation of additional reserves, and this majority ought to include at least half the major creditor countries.
In their communiqué, the Finance Ministers indicated that, because of the economic strength of their six countries and their union in the eec, they must, in any event, be assured of a proper influence in the Fund, particularly in respect of voting. Accordingly, they supported the idea that new automatic drawing rights, separate from the Fund’s traditional operations, could be established.
The kernel of a contingency plan for reserve creation was at last forming. Nonetheless, it was apparent that negotiation of the precise features of such a plan was not going to be easy.
See Chap. 4 above, p. 85.
See Chap. 4 above, p. 92.
Because many of the Deputies were very concerned about the effect on gold of a new reserve asset and the relationships between the two, they also set up another working party, under the chairmanship of Mr. G. A. Kessler, of the Netherlands, to study the role of gold in the monetary system.
The secretariats for the other three meetings were similar to that for the first meeting. Tables 1 and 2 give the names of the participants and observers at the four joint meetings, along with their titles or positions, and thus identify these persons more fully than has been done in the text. Table 1 is on pp. 134–37 below; Table 2 is at the end of Chap. 6, on pp. 162–65 below.
See Table 1 for a list of the participants (pp. 134–37 below).
Published below in Vol. II, pp. 15–23 and 24–29.
See Chap. 3, p. 63 above.
Robert Henrion, Minister of Finance, Belgium; Michel Debré, Minister of Economy and Finance, France; J. Schoellhorn, Secretary of State, and Franz Josef Strauss, Minister of Finance, Federal Republic of Germany; Emilio Colombo, Minister of the Treasury, and Athos Valeschi, Secretary of State, Italy; Pierre Werner, President of the Government and Minister of Finance, Luxembourg; and H. Johannes Witteveen, Deputy Prime Minister and Minister of Finance, Netherlands.