Chapter 8: SDRs Enter into Force (1968–69)
- International Monetary Fund
- Published Date:
- February 1996
On July 28, 1969 the Amendment to the Articles of Agreement establishing SDRs and amending the original Articles to change certain of the Fund’s rules and practices became effective for all members of the Fund. This was a little more than a year after the proposed amendment was approved by the Board of Governors (May 31, 1968). An interval was necessary because many of the members of the Fund had to pass enabling legislation in order to accept the proposed amendment. By July 28, 1969, acceptances had been received by 69 of the then 111 Fund members—that is, by three fifths of the members having four fifths of the total voting power, as provided in Article XVII (a).
The United States had been among the first to accept the amendment. President Lyndon B. Johnson had proudly announced the U.S. acceptance to the Governors on September 30, 1968, as he addressed them at the Annual Meeting.1 The U.S. acceptance thus had come exactly five years after President Kennedy had suggested the need for action with regard to international liquidity. Only eight of the countries in the Group of Ten, however, were in the initial group accepting the new facility by July 1969; Italy and France accepted later, Italy on October 2, 1969 and France on December 30, 1969.
Once the proposed amendment had been accepted, the Special Drawing Account was to come into existence when Fund members having 75 per cent of the total quotas had deposited instruments of participation. That condition was satisfied on August 6, 1969, a little more than a week after the amendment became effective. The participants in the Special Drawing Account—numbering 50 on that date—were thereby enabled to take decisions with respect to the management of the Account, including any allocation of SDRs.
In his concluding remarks to the Board of Governors at the 1969 Annual Meeting, the Managing Director characterized the establishment and activation of the SDR facility as “a momentous innovation in the international monetary system—a landmark in the process of international monetary cooperation.”2 What was significant about the advent of SDRs was that there was instituted a unique type of reserve, one that had never before existed, issued by an international agency rather than by any national government, and used by governments, along with gold and foreign exchange, to settle international accounts. A mechanism had been agreed for the deliberate creation of reserves to inject liquidity into the international monetary system, should the need arise.
Because of their novelty, and because they resembled gold more than they did anything else, SDRs were initially referred to by financial journalists and laymen as “paper gold.” But within a very short time the term by which the Fund and technicians called them, SDRs, had gained wide acceptance. Most significant of all was that the Fund had been given the kind of reserve-creating powers that had been denied it at its inception.
Amendment of By-Laws and Rules and Regulations
After the amendment to the Articles became effective, it was possible to adopt the amendments to the By-Laws and to the Rules and Regulations of the Fund that were necessary both because of the Special Drawing Account and because of the changes in the rules and practices of the Fund.
The amended By-Laws spelled out, for example, that in matters pertaining exclusively to the Special Drawing Account, only those Governors and Executive Directors could vote who had been appointed or elected by Fund members that had become participants in the Special Drawing Account. Other amendments to the By-Laws related to the Executive Directors’ Annual Report to the Board of Governors: that Report was hereafter to include a review of the operation of the Special Drawing Account and of the adequacy of global reserves and to extend to the Special Drawing Account the annual external audit of the financial records and the operations and transactions of the Fund. More far-reaching additions were needed in the Rules and Regulations. For one thing, the Rules and Regulations had to include a description of the various operational steps that would apply to the use of SDRs.
The Executive Directors had considered a first draft of the amendments to the By-Laws and the Rules and Regulations during the course of their discussions of the proposed amendment to the Articles. They considered a redraft more carefully over the three months from mid-June to mid-September 1969. On September 18, 1969 the Executive Board approved the texts of these amendments, and on October 2, 1969 the Board of Governors adopted Resolutions Nos. 24-9 and 24-10 stating that the amendments of the By-Laws should take effect and that the Governors had reviewed the amendments to the Rules and Regulations recommended by the Executive Board and had no changes to suggest.3 One By-Law, Section 23, pertaining to the establishment of a Committee on Interpretation of the Board of Governors, had not, however, been adopted by the end of 1971.
The amended Rules and Regulations helped to give operational substance to the new facility.4 They specified, for example, the methods for deciding which currencies were convertible in fact and how exchange rates would be determined in connection with transfers of SDRs. They detailed the procedures for the provision and conversion of currency in exchange for SDRs and for designating participants to provide currency. They directed the Fund to make calculations for each participant at the end of given calendar intervals so as to determine whether, and to what extent, a participant would need to acquire and hold SDRs between the date of the calculation and the end of any five-year period in order to enable the participant to observe its reconstitution obligation. They provided for the procedures to deal with a participant’s failure to fulfill its obligations that involved or could lead to the suspension of the participant’s right to use SDRs.
A summary description of the SDR facility as it finally emerged follows.5 This description lays the framework for the discussion, in Chapters 10, 11, and 12, of the activation of the facility in January 1970 and operations and transactions in SDRs in 1970 and 1971.
Two Separate Accounts
After the establishment of the SDR facility, the Fund set up two separate accounts, a General Account and a Special Drawing Account. The Fund’s operations and transactions involving SDRs were conducted through the Special Drawing Account. All other operations and transactions of the Fund, including transactions of an administrative character, were conducted through the General Account. Operations and transactions involving the acceptance or holding of SDRs in the General Account or the use of SDRs so held were carried out through, and recorded in, both Accounts.
The Board of Governors and the Executive Board functioned for the Special Drawing Account as well as for the General Account. But when decisions were taken on matters pertaining exclusively to SDRs, those entitled to vote could cast only the votes of the participants in the Special Drawing Account, and the special majorities that were specified for certain decisions were based on the total voting power of those participants only. No special provision was introduced with respect to the voting strength of a participant on matters pertaining to the Special Drawing Account: a member that was a participant thus had the same voting strength (250 basic votes plus 1 additional vote for each part of its quota equivalent to US$100,000) whether an issue related to the General Account or to the Special Drawing Account.
Each member of the Fund was entitled to become a participant in the Special Drawing Account, but was not required to participate. Participation involved the assumption of both financial and nonfinancial obligations, and in order to become a participant a member had to deposit with the Fund an instrument setting forth that it undertook all these obligations and that it had taken all the steps necessary in accordance with its own domestic law to enable it to carry them out.
The basic financial obligation each participant assumed was the obligation to provide currency convertible in fact to another participant that was using its SDRs in a transaction subject to designation. The participant providing convertible currency received an equivalent amount of SDRs. In other words, a participant designated by the Fund to do so was obliged to provide convertible currency in return for SDRs. This obligation to accept SDRs was not unlimited, however; it ceased at the point at which a participant’s holdings of SDRs were three times its net cumulative allocation, that is, its obligation could extend up to a total amount equivalent to twice the net amount of SDRs allocated to the participant. The obligation could be extended beyond this limit to a higher limit agreed between a participant and the Fund.
The currency obtained by a participant in return for its SDRs was thus not drawn from any pool of resources of gold or currency held by the Fund in the Special Drawing Account. Participants that received allocations of SDRs were not required to deposit an equivalent amount in gold or currencies for the purpose of subsequent operations or transactions in SDRs or for any other purpose. Only in the abnormal circumstances of the withdrawal of a participant from the Special Drawing Account or the liquidation of the Account would the Fund hold any gold or currency in that Account, and then only temporarily and in order to facilitate the settlements that were involved in these phenomena. This was one of the most fundamental differences between the two Accounts. In the General Account the Fund held large resources of gold and currencies. The Special Drawing Account did not contain even the resources with which to cover the administrative expenses of running the Account. These expenses were paid out of the General Account, subject to reimbursement by assessments levied in SDRs on all participants.
Allocations and Cancellations of SDRs
Basic Principles and Techniques
Article XXIV, Section 1, stated the basic principles and considerations governing allocation and cancellation of SDRs:
(a) In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.
(b) The first decision to allocate special drawing rights shall take into account, as special considerations, a collective judgment that there is a global need to supplement reserves, and the attainment of a better balance of payments equilibrium, as well as the likelihood of a better working of the adjustment process in the future.
It was thus a global shortage of unconditional liquidity that had to guide the Fund in reaching a decision on whether to generate SDRs. Decisions were not to be determined by the desire of one or more participants for additional reserves in order to enable them to defer the measures necessary to correct balance of payments disequilibrium. The need that SDRs was intended to satisfy had to be not only global but also long-term. In taking its decisions, the Fund was to deal with long-term trends in the needs of the community of its members. It was not intended, therefore, that the Fund should attempt the short-run management of the volume of international liquidity in the way that national monetary authorities regulate domestic liquidity.
The general formulation in the amendments, which related decisions to allocate or to cancel SDRs to the attainment of the Fund’s purposes and to worldwide inflation and deflation, recognized that there were no agreed mathematical or mechanical tests by which to determine whether there was too little, enough, or too much liquidity in the international monetary system. In effect, a qualitative judgment had to be made. The first decision to allocate SDRs had to take into account three “special considerations”: (1) a collective judgment that there was a global need to supplement reserves; (2) the attainment of a better balance of payments equilibrium; and (3) the likelihood of a better working of the adjustment process in the future.
Decisions to allocate SDRs were made for basic periods, which normally were to be five years in duration and which were to run consecutively. A basic period could be an empty period, in which there was neither allocation nor cancellation. The length of the normal basic period was an expression of the principle that the Fund was to be dealing with long-term trends in reserves. The choice of five years had also been intended to make it possible to deal simultaneously with the levels of both conditional and unconditional liquidity, since under the then existing Articles the Fund had to review the adequacy of quotas at intervals not exceeding five years.
Allocations that were decided upon were normally to be made annually so as to provide for a steady expansion or contraction in the volume of SDRs outstanding. Allocations were made on the basis of participants’ quotas in the Fund on the date of the relevant decision to allocate, unless the Fund decided that allocations were to be made at different intervals or were to be based on quotas at different dates. A decision to allocate expressed the amount to be allocated as a uniform percentage of quota for all participants rather than as an absolute amount. Provision was also made for determining the amounts of SDRs to be canceled in the event of decisions to cancel.
A participant whose Governor did not vote in favor of a decision under which allocations for a basic period were being made did not have to receive allocations under that decision if it did not wish to do so. In other words, a participant might “opt out” of a decision to allocate SDRs over a basic period by not voting for the related decision and by informing the Fund that it wanted no allocation under the decision. Subsequently it might, if the Fund permitted, “opt back in” and receive later allocations made during the remainder of the basic period. A participant was required to receive SDRs allocated to it if its Governor voted in favor of the decision under which the allocations were made. A member that became a participant after a basic period had started did not receive allocations during that basic period, unless the Fund decided that the member would start to receive allocations beginning with the next allocation after it became a participant. It was expected that normally the Fund would so decide.
Allocations of SDRs might be made only to participants, but the holding of SDRs was not restricted to participants. The Fund itself was authorized to accept and hold SDRs in, and use them through, the General Account; and by an 85 per cent majority of the total voting power, the Fund might permit nonmembers, members that were not participants, and institutions that performed the functions of a central bank for more than one member, to engage in operations and transactions involving SDRs.
Procedure for Making Decisions
The procedure for arriving at decisions on allocations and cancellations of SDRs defined precisely the roles of the Managing Director, the Executive Board, and the Board of Governors. The Managing Director must make a proposal. But he must first satisfy himself that the proposal would be consistent with the principles and special considerations governing allocations and cancellations, and he must then conduct such consultations as would enable him to determine that there was broad support among participants for the proposal. The Managing Director also had some guidance for determining when to consider the possibility of making proposals. In accordance with the concept of consecutive basic periods, he was directed to make a proposal not later than six months before the end of each basic period or within six months of any request for a proposal by the Board of Governors or the Executive Board. He might, however, make a report instead of a proposal if he concluded that there was no proposal that commanded broad support among participants.
The Executive Board then had to concur in the Managing Director’s proposal before it could be presented to the Board of Governors. A decision to concur required a majority of the votes cast. The Executive Board might refuse to concur but it had no authority to change a proposal. If it concurred, the proposal still went forward as the proposal of the Managing Director, for which he continued to have responsibility. It was, of course, unlikely that the Executive Board would withhold its concurrence, since the Managing Director would have determined beforehand whether there was the broad support necessary for a proposal.
The last step in the procedure was the decision by the Board of Governors; the Board of Governors could not delegate to the Executive Board the authority to take decisions on allocations or cancellations of SDRs. A decision approving the Managing Director’s proposal as transmitted to the Board of Governors, or with modifications determined by the Board of Governors, could be adopted only if the very high majority of 85 per cent of the total voting power of participants was in favor of the decision. With such a majority, a decision to make allocations of SDRs had to win the support of almost the whole community of participants, including many, and perhaps most, of those in balance of payments surplus. These participants were likely to be the most vigilant in ensuring that allocations did not outstrip the global need for reserves.
Once allocations of SDRs were made, each holder received interest on the amount of its holdings and each participant paid charges on its net cumulative allocation. The rates of interest and charges were the same, so that a participant holding more SDRs than its net cumulative allocation received a net payment, and one holding less made a net payment. Charges and interest were payable in SDRs. The initial rate was set at 1½ per cent per annum, but the Fund might change this rate. The payment of interest, which did not exist for gold reserves, was intended to be an inducement to hold SDRs.
Operations and Transactions in SDRs
There was, in effect, a requirement of need before a participant used SDRs: A participant was expected to transfer its SDRs to another participant only to meet balance of payments needs or because of adverse developments in its official reserves. The provision regarding developments in reserves had been intended to indicate that the participant might have a need to use SDRs even if developments in its reserves were attributable to conversions of balances in its currency rather than to a balance of payments deficit. But, in particular, a participant was not expected to use its SDRs for the sole purpose of changing the composition of its reserves as between SDRs and holdings of gold, foreign exchange, and its reserve position in the Fund. This basic principle of need protected other participants from the risk that a participant that had no economic justification for the use of SDRs might be tempted to use them solely in order to get rid of them and to obtain reserve assets that it preferred.
Despite the foregoing, a participant’s use of SDRs was unconditional, clearly not to be challenged in any circumstances. The use of SDRs was not dependent, for instance, in any way on a participant’s use of the Fund’s regular resources, nor could a participant’s use of SDRs be questioned on the basis of the economic and financial policies that it was pursuing. If a participant could be prevented from using its SDRs because its policies were regarded, for example, as inadequate to correct its external payments difficulties, SDRs would be subject to the conditionality associated with drawing rights in the Fund’s General Account. SDRs, in contrast to regular drawings from the Fund beyond the gold tranche, represented unconditional liquidity. Hence, in effect a participant was entitled to transfer its SDRs but was not expected to do this unless it had a need to do so because of its balance of payments or because of developments in its reserves.
By the same reasoning, there was no provision in the Articles which declared that a participant could use no more than a proportion of its net cumulative allocation of SDRs: a participant was able to use its SDRs until none remained. Use beyond a certain average proportion over time, however, might require the participant to restore its holdings to a certain extent (described below in the section on Reconstitution).
The principle that a participant was expected to use its SDRs only when in need protected transferees. On the other hand, the fact that the use of SDRs was immune from challenge protected transferors. The tests for ascertaining whether a transfer of SDRs was proper were not applied by the Fund before a transfer was made, and the Fund could not obstruct a transfer even if it could be demonstrated that there was no balance of payments or reserve need. All of these provisions emphasized the asset-like character of SDRs.
To balance the interests of participants, however, the Fund might make representations to a participant that had not fulfilled the expectation. The Executive Board could decide ex post that a participant had failed to meet the test of need when it used its SDRs. That participant was then subject to designation by the Fund as a transferee of SDRs even though it would not otherwise have been subject to designation. Designation for that purpose was limited to the amount of SDRs that the participant had used in nonconformity with the expectation as to need.
A participant transferred its SDRs to another participant designated by the Fund and obtained currency convertible in fact. (SDRs could not be used in transactions with private parties in the market.) The term currency convertible in fact was defined in the Articles, and the Rules and Regulations set up procedures by which the Fund might determine which currencies qualified to be termed convertible in fact.
When a participant wished to use its SDRs, it informed the Fund so that the Fund could give instructions to the participant or participants that it designated to provide currency convertible in fact. If the transferor of SDRs wished to receive a particular currency convertible in fact, it must request that in the notice sent to the Fund, but the transferor was not required to express a preference for a currency if it was content to receive any currency convertible in fact. The designated participant might provide any currency convertible in fact. If the currency provided was not the currency convertible in fact requested by the transferor, then the country that had issued the currency provided must convert it into the currency requested.
Instructions for conversion when a participant transferred SDRs to a designated participant were given by the Fund so as to avoid procedures that might be inadequate or unfamiliar if conversions had to be arranged between participants. The Fund encouraged participants to inform it of the currency convertible in fact that they were likely to provide when designated and of the currency convertible in fact that they were likely to request when transferring SDRs. The rules stated that instructions for the provision or conversion of currency were to be carried out promptly, and the objective was to see that the transferor received the currency it had requested two business days after the Fund received the communication requesting the currency or as soon as possible thereafter.
The preceding chapter pointed to the close relation between the definitions of currency convertible in fact and the exchange rates applicable to various currencies. The purpose of the provisions of the amended Articles regarding exchange rates was to specify that in operations or transactions between participants in the Special Drawing Account the transferor must receive the same value, whatever currency was provided and whichever participant provided it.
It will be recalled that one of the most important issues that had to be resolved in determining the qualities of a reserve asset was whether a participant wishing to use the asset should be able to decide for itself on the identity of the transferee or whether there should be a system of guidance. The solution finally agreed upon was a system of guidance by the Fund.
Under the system of guidance, the Fund was to channel the flow of SDRs toward appropriate transferees. The general principles to be used for designation and the rules for the first basic period were specified in the Articles. Briefly, a participant was to be subject to designation if its balance of payments and gross reserve positions were sufficiently strong, or possibly if it had a strong reserve position even though it had a moderate balance of payments deficit. Designations of participants were also to aim over time at a balanced or equitable distribution of SDRs among participants.
Much discussion had attended the concept of a balanced or equitable distribution of SDRs among participants and how to achieve it. There had been great concern that some participants would make excessive use of their SDRs compared with other components of their reserves; by the same token, other participants would have to hold excessive amounts of the new assets. Finally, it was agreed that the criterion would be an approach to equality in the ratios of participants’ holdings of SDRs in excess of their net cumulative allocations to their official holdings of gold and foreign exchange. These ratios were to be “harmonized” over time. Notwithstanding the importance for designation of the principles of a strong balance of payments and reserve position and of harmonization of the ratios of holdings of SDRs of participants, priority was normally to be given to designations to ensure certain operational objectives of the Special Drawing Account: to help participants observe their obligations to reconstitute, to correct any failure by participants to observe the expectation as to need when using SDRs, or to provide participants with the SDRs that they owed the Fund because they did not hold enough to meet their shares of a cancellation.
In accordance with the Rules and Regulations, the Executive Board was to adopt a designation plan at quarterly intervals. This plan would list the participants subject to designation during that quarter and the amounts for which they would be designated. All participants subject to designation in the forthcoming quarter had to be included in the plan. The total amount of all designations equaled the amount considered appropriate. If this forecast turned out to be wrong, a supplementary plan was to be adopted by the Executive Board. In addition, should any participant, an Executive Director, or the Managing Director so request, the Executive Board might review a plan and amend it if considered necessary. This amendment might be desirable, for example, if an unexpected and serious change occurred in the balance of payments and reserve position of a participant. The extent to which participants were actually designated depended on the volume of transactions involving designation that occurred.
The acceptance of SDRs by designated participants was, of course, the rock on which the use of SDRs rested. But participants were not obligated to accept SDRs without limit. A participant’s obligation to accept further SDRs ceased at the point at which its holdings in excess of its net cumulative allocation reached twice that amount. That is to say, a participant could not be required to hold more SDRs than three times its net cumulative allocation.
One of the most controversial of all the questions debated in the course of setting up the new reserve facility, and the last to be resolved, was whether a participant that used its SDRs should be bound to restore its holdings of them. The solution was a pragmatic compromise. A participant would be entitled to use all of its SDRs and would not be required to retain a permanent minimum balance. But it would be required to maintain a certain average balance in its holdings over time, and the maintenance of this average balance might require a participant to reconstitute its holdings of SDRs. A participant’s net use of SDRs had to be such that the average of its daily holdings of SDRs over any five-year period would be not less than 30 per cent of the average of its daily net cumulative allocation over the same period. If a participant used no more than 70 per cent of its average net cumulative allocation at all times, it would have automatically fulfilled this obligation. If it used more than 70 per cent for some part of a five-year period, it would have to increase its holdings above 30 per cent for a period long enough to bring its use for the whole five-year period to no more than 70 per cent on the average.
The main mechanism for the reconstitution of SDRs was the designation of participants to accept transfers of SDRs from other participants. The Fund would make calculations for each participant to determine whether and to what extent a participant would need to acquire and hold SDRs between the date of the calculation and the end of any five-year period in order to enable the participant to observe its obligation to reconstitute. Under the Rules and Regulations, when these calculations showed that a participant needed to obtain SDRs for any reconstitution period in an amount per quarter that equaled or exceeded 10 per cent of the participant’s net cumulative allocation at the end of the period, the participant was subject to designation “as of the beginning of the calendar quarter following the calculation, for an amount of special drawing rights equal to the largest amount per quarter calculated for any reconstitution period.”6
The value of SDRs was stated in terms of gold and not in terms of any national currency, with the unit of value equivalent to 0.888671 gram of fine gold. (This was the gold content of the U.S. dollar of the weight and fineness in effect on July 1, 1944 and also the value of the dollar when the SDR facility came into being in August 1969.) Participants that received SDRs, whether by allocation or by subsequent transfer, could be certain that there would never be a reduction in the gold value of their SDRs, and, therefore, they could accept them without fear of loss. In effect, SDRs enjoyed an absolute guarantee of the maintenance of their gold value. Changes in the par values of currencies in terms of gold did not affect the gold value of SDRs. If a currency was devalued in terms of gold, an SDR commanded more units of that currency on a transfer of SDRs than it did before the devaluation. Moreover, even a uniform proportionate change of par values in terms of gold—equivalent to a change in the price of gold in terms of currencies—could not affect the gold value of the SDR.
This feature of SDRs—the fixed gold value—became of even greater importance after August 15, 1971, when the exchange rate for the U.S. dollar in terms of other currencies was no longer fixed but an SDR retained its specified value.
Significance of the New Asset
The significance of an arrangement whereby the Fund could create reserves was commented upon by President Johnson in mid-1968 when he signed into law the U.S. Special Drawing Rights Act:
For the first time in the world’s financial history, nations will be able to create international reserves by deliberate and joint decision—and in amounts needed to support sound growth in world trade and payments.7
To bring the idea into reality had required an intensive period of study, negotiation, and, finally, legislation. The process had seemed long and drawn out to the watching public and to the financial markets, as well as to those intimately involved. That the negotiations were so prolonged—they had taken longer than those that had preceded the birth of the Fund itself in 1944—and that substantial compromise was required of all parties reflected the nearly equal financial strength of the major industrial countries. Unlike the situation toward the close of World War II, one or two economically dominant countries could not, in the second half of the 1960 decade, draw up an international monetary arrangement to which other countries could be expected to adhere.
To most the effort seemed worthwhile. The Managing Director, for example, said that “given the novelty, the complexity, and the responsibility of the task, I am convinced that the time invested in building a sound structure, and in developing the understanding necessary for the proper use of that structure, has been well justified.”8
The new drawing rights were certainly novel, and were unlike any other reserve asset or money. Their uniqueness has been described by the General Counsel of the Fund in these words:
The characteristics of special drawing rights are not the result of any single approach. They are the distillation of a chemistry—some might say an alchemy—in which many theories and many compromises, economic, legal, and political, went into the alembic. The product cannot be classified according to such familiar categories as “legal tender,” “money,” or “credit.” Special drawing rights are sui generis.9
It seemed that the Fund could create reserves, as it were, out of nothing; it did not need to hold a corresponding amount of financial resources. Just how revolutionary the introduction of SDRs was may be noted by recalling some of the views prevalent at the time of the Bretton Woods Conference. A document issued by the U.S. Treasury in June 1944, for example, explained that the International Monetary Fund then being proposed would not have any means of creating, holding, or transferring currencies or deposits that did not originate with the member countries themselves. It was explicitly noted that the creation of credit was to remain exclusively a function of the monetary authorities of member countries. Among the reasons cited for preferring this arrangement to one permitting the Fund to create some new or special monetary unit was the following:
… The financial strength and stability will be greater in the case of a Fund which possesses a substantial amount of tangible resources for carrying on its operations than in the case of an international institution which has no resources other than an agreement on the part of member countries to accept the credits created by that institution in exchange for real goods and services.10
By coincidence, the date on which the amendment to the Articles became effective, July 28, 1969, was 25 years almost to the week after the date, July 22, 1944, on which the original Articles were adopted at the Bretton Woods Conference. The advance made in that interval was that the Fund was at last to be given the power to create reserves that it had not received at Bretton Woods.
Many of the disputes that had attended the formation of SDRs subsided rather quickly. Whether they were or were not to be called reserve assets, for instance, soon was no longer a question that provoked ardent dispute. By the time of the 1969 Annual Meeting, where a decision was taken to activate the new facility, Mr. Giscard d’Estaing was calling the SDR a reserve asset, and no longer was insisting on the term “credit”:
… I wish to inform you of the reasons for which France has taken the decision to participate in the activation of the SDR system. First, as the Managing Director of the Fund has so aptly reminded us, the system is now in existence: we have ourselves always considered that alongside conditional liquidities there was room in the modern world for a new reserve asset of an unconditional type, designed to supplement gold and foreign exchange in the holdings of the central banks. This was the purport of the proposal that we made for the creation of a collective reserve unit, or CRU.11
A complex of reasons explains why the dream of many monetary theorists—a mechanism for deliberate creation of international reserves—finally became a reality. Foremost was the persistence of the officials involved. Time and again the monetary authorities of the ten largest industrial countries came together at the highest level to try to resolve their differences. What prompted their frequent meetings was not their fears that the supplies of gold or other reserves in the world were declining or that a shortage of reserves was imminent. Indeed, after the SDR facility was activated in 1970 some observers still did not see much evidence of the need for more reserves in the monetary system. The reason for trying to reach agreement on SDRs was rather that, after 1964–65, the monetary officials of the countries in the Group of Ten were forced to deal more and more often with monetary crises. These officials hoped that somehow, in ways that were not yet clear, the new supplement to the gold exchange standard would alleviate monetary crises and ease their problems.
Another reason why agreement finally came about in spite of differing opinions was that the new facility was initially looked upon as an experiment: participants took a wait-and-see attitude. Some of the rules, for example, were specified for the first basic period only and were to be reviewed later; and some were to be determined only after the facility had been in use for a period of time.
That the final scheme was an international one—open to all Fund members—rather than the limited arrangement initially envisaged was, of course, politically expedient to the countries in the Group of Ten. Many of them had a strong desire not to offend countries outside the Group. For political as well as other reasons, the United States, for instance, was especially eager to please Australia and was very sensitive to the views that had been expressed by Mr. Holt when he was the Treasurer of that country.12 Moreover, since the countries in the Group of Ten had become nearly equal in economic strength, and no one country or countries in the Group could insist on its own ideas, it was all the more likely that, once they had reached accord among themselves on the features of any arrangement, the final arrangement would have to become operable through some neutral agency, such as an international organization.
That deliberate reserve creation took the form of special drawing rights in the Fund was, in no small part, a tribute to the intensive efforts of the Executive Directors, the Managing Director, and the staff. Their expertise and experience had enabled them to bring forth a host of studies, plans, and suggestions, and to convince the officials of the countries in the Group of Ten that the Fund was the appropriate agency to operate any new reserve facility.
Address by the President of the United States, Summary Proceedings, 1968, p. 2.
Concluding Remarks by the Managing Director, Summary Proceedings, 1969, p. 250.
Summary Proceedings, 1969, pp. 260–75 and 320–25.
The By-Laws and the Rules and Regulations, as amended to March 20, 1972, are reproduced in Vol. II below, pp. 158–91.
See also Joseph Gold, Special Drawing Rights: Character and Use, IMF Pamphlet Series, No. 13, 2nd ed. (Washington, 1970); and J. J. Polak, Some Reflections on the Nature of Special Drawing Rights, IMF Pamphlet Series, No. 16 (Washington, 1971).
Rule P-4. Reproduced in Vol. II below, p. 189.
Department of State Bulletin, Vol. 59 (1968), p. 49.
Opening Address by the Managing Director, Summary Proceedings, 1969, p. 11.
Gold, Special Drawing Rights: Character and Use, p. 28; cited above in footnote 5 of this chapter.
Questions and Answers on the International Monetary Fund (June 10, 1944), reply to Question 15. Reproduced in History 1945–65, Vol. III, pp. 136–82; reference is to p. 154.
Statement by the Governor of the World Bank for France, Summary Proceedings, 1969, p. 58.
See, for example, Chap. 4, p. 81.