IMF History (1966-1971) Volume 1

Chapter 10: Decision to Allocate SDRs (1969)

International Monetary Fund
Published Date:
February 1996
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Economic Circumstances in 1969 were conducive to an early activation of the SDR facility. Official holdings of gold and foreign exchange had been declining for several years, and at the end of 1968 the world reserve situation was considered tight. The balance of payments of the United Kingdom and the United States—countries that were reserve centers—had begun to improve in 1969, and, consequently, reserves in the form of sterling and dollars were expected to decline further in the near future. Moreover, in contrast to its previous balance of payments surpluses, France had begun to encounter deficits and to experience substantial losses of reserves during the second half of 1968 and the first half of 1969. These developments were sufficiently indicative of potential shortages in the world supply of liquidity that officials of European countries—including the French authorities—who for some years had been voicing strong opposition to activation of the new facility were now more inclined to proceed. Thus, by the time the Special Drawing Account was established in August 1969, the process of deciding to allocate SDRs was well under way.

Circumstances Leading to Activation

The world reserves situation at the end of 1968 was considered tight mainly because there had been a marked decline in traditional reserves and because further declines were expected. By the end of 1968 the decline in world reserves in the form of gold had become substantial. In the four years 1965–68, official holdings of gold had fallen by almost $2 billion. The outflow of gold from official holdings had been $1.7 billion in the first quarter of 1968 alone, when speculative demand for gold had soared preceding the suspension of Gold Pool operations in March 1968.

Equally noteworthy was that countries’ reserves in the form of dollars were no longer being augmented as a consequence of the U.S. payments deficit. Only a relatively small proportion of the U.S. deficits in 1965–68 had been financed by the accumulation of official claims on the United States; instead they had been financed primarily by a drop of over $4.6 billion in U.S. monetary gold. Official claims on the United States payable in dollars had actually declined. In addition, official holdings of sterling, other than holdings that arose mainly out of special arrangements to assist the United Kingdom in its external crises, had shown a net decline of $1.7 billion over the four years 1965–68.

As a result of these influences, world reserves held in traditional forms—gold, claims on the United States payable in dollars, and what might be termed normal sterling—had declined by $4.4 billion in the four years ended 1968. There had been a $2.8 billion increase in total foreign exchange holdings, but this increase was attributable mainly to larger reserve positions in the Fund. The potential shortage of world reserves was revealed also by the fact that world reserves had been declining in relation to the value of world trade. Calculations made by the Fund staff showed that for a group of 60 countries there had been a steep and fairly regular decline in the ratio of reserves to imports for the period 1952–68, broken only in 1952–53 and 1957–58, when temporary setbacks in trade had occurred.

Further Declines in Reserves Expected

An even greater shortage of world reserves appeared to be in the offing. By the first quarter of 1969 the United Kingdom’s large current account deficits of 1967 and 1968 had been sharply reduced, and refluxes of short-term capital were enabling the U.K. authorities to repay some of the substantial official debt which they had incurred in the previous two years. Liabilities in sterling were thus declining.

An even more significant factor signaling prospective decreases in world reserves was the turnabout in 1968 and the first half of 1969 in the capital accounts of the United States. On January 1, 1968, President Johnson had announced a series of measures aimed at reducing the U.S. overall balance of payments deficit for the coming year. The previously voluntary controls on capital exports had been made mandatory in order to reduce outflows to the developed countries. In particular, curbs had been placed on direct investments in developed countries financed out of funds obtained in the United States, or out of funds borrowed at short term abroad, or out of profits earned abroad. The voluntary program for banks and other financial institutions that had been in effect for the previous few years had also been made more restrictive, to induce a net repatriation of funds from continental Western Europe. These measures were expected to improve the U.S. balance of payments by $1.5 billion. Additionally, in August 1968 a 25 per cent increase in the rates of the U.S. interest equalization tax on new foreign portfolio investments by U.S. residents had been introduced.

Another factor that had operated to improve the external capital accounts of the United States in 1968 and the first half of 1969 was the progressive tightening of general financial conditions in the United States from the latter part of 1968 onward. U.S. banks had sought to mitigate the impact of stringent monetary policy by borrowing from their foreign branches, and U.S. corporations had borrowed abroad to meet part of their financial requirements. The U.S. payments position had benefited still further from sizable purchases of existing corporate securities on the U.S. stock market. That market was booming during this period, and capital inflow from this source alone had totaled $2.1 billion in 1968, more than double the inflow in 1967. Also, Europeans were more willing to acquire new securities issued by U.S. corporations to finance their foreign direct investment.

All of these circumstances had made for an exceedingly large favorable shift in the capital accounts of the United States. From 1967 to 1968 there had been, for example, a turnaround of $7.5 billion in the U.S. capital accounts. As a result, notwithstanding a worsening of the current account by some $2.6 billion, the overall balance of payments of the United States on the official settlements basis had shifted from a deficit of $3.4 billion in 1967 to a surplus of $1.6 billion in 1968.1

In the first quarter of 1969 the United States again had had a large surplus on the official settlements basis. It came to $1.7 billion, greater than for the whole year 1968. As a consequence, there had been a decline of $2.1 billion in other countries’ official reserves, including a decline of $1.8 billion in their foreign exchange holdings.

Changes in EEC Positions

Juxtaposed against the improved balance of payments positions of the United Kingdom and the United States was the situation of France, which had radically worsened. Economic difficulties in France had caused extreme pressures on the franc in May and June 1968 and again in August and November, and French gold reserves had declined by $1.7 billion in 1968, the largest loss by a single country in a year in which several countries had lost reserves. The inverse of outward flows of capital from France had been massive inflows into the Federal Republic of Germany, with consequent heavy upward pressures on the deutsche mark.2

After the many exchange crises of 1968 and the first part of 1969, yet another atmosphere of crisis greeted the opening of the Twenty-Fourth Annual Meeting, at which the Board of Governors was to decide on the Managing Director’s proposal for the activation of the SDR facility. Just ten days before, on September 19, 1969, the Executive Board had approved a large stand-by arrangement for France, and on September 26, the Friday before the Annual Meeting opened, France had drawn about half of the amount of this stand-by arrangement. Furthermore, on Thursday and Friday before the Annual Meeting, another heavy flow of funds into the Federal Republic of Germany had forced that Government to take the emergency step of closing the foreign exchange markets. On Monday morning, September 29, it was announced that the authorities would reopen the exchange markets on the following day without a fixed rate for the deutsche mark. Many of the Governors learned for the first time about the decision to let the deutsche mark float as they listened to the Managing Director’s opening address.3

Declines in world reserves and the prospect of further declines, together with the lessened deficits of the United Kingdom and the United States and heavy declines in France’s reserves, had brought about a change in the attitude of the eec countries toward an early activation of the SDR facility. This change in attitude had been evident on June 4 and 5 and on June 27, 1969, when many of the Deputies of the Group of Ten met as members of Working Party 3 of the Economic Policy Committee of the oecd, and also when they met as Deputies of the Group of Ten on June 6, 1969—their first meeting in over a year—and again at the end of the month. Several of them had stated that their countries could hardly accept any further losses in reserves without having to take corrective action. It was, they thought, more than likely that a global need for reserve creation was emerging—a need that would have to be met by the new method just agreed to in the amendment to the Fund’s Articles.

There had been differences in emphasis—some countries putting greater stress on the risk that too long a delay in creating reserves would frustrate balance of payments adjustment, others worrying that too much reserve creation too early would interfere with countries’ willingness to combat inflation. But in effect there had been a consensus among the Deputies that it would not be inappropriate to activate the SDR facility in the near future. Arrival at this consensus had been facilitated by assurances from the United States and the United Kingdom that the accruals to their reserves that would arise from the creation of SDRs would not interfere with their determination to proceed with the correction of their external payments imbalances.

Staff Preparation

In March 1969, several months before the Special Drawing Account came into existence, the Managing Director had alerted the Executive Directors to the need for the Fund to be ready for activation. The Directors had agreed that, while such preparation would not prejudge their positions on actual activation, it should nonetheless proceed.

As early as January 1969 the staff had begun to prepare papers relevant to activation—the issues that would have to be considered, the long-run trends in the rate of growth of world reserves, the interconnections between reserve availabilities and balance of payments adjustment, and various calculations projecting the need for increases in world reserves through 1973.

The staff regarded estimating the required amount of world reserve supplementation as one of the most difficult of the technical questions involved in the SDR exercise. It will be recalled that this had been one of the most persistent of the problems that plagued international monetary officials in their earlier negotiations. The discussions about international liquidity had, in fact, originated with a debate on whether additional reserves were or were not necessary for the smooth operation of the international monetary system. As the discussions had progressed, possible qualitative criteria and quantitative measures by which total reserve needs might be judged had been considered on several occasions.

The estimate that the staff arrived at for the required growth in world reserves was $4 billion to $5 billion a year. This represented an annual increase of 5–6 per cent, somewhat less than the trend in the rate of growth of world financial transactions. But the most uncertain element in the calculation for reserve supplementation, in the staff’s opinion, was the extent to which gold and foreign exchange reserves might increase in the foreseeable future, especially over the next five years. The rather cautious estimate was that reserves other than SDRs might account for an increase in total world reserves of $1 billion to $1.5 billion a year. Hence, the staff had come to think in terms of allocations of SDRs of about $2.5 billion to $4 billion a year, starting in 1970, and a first basic period of five years, the normal period specified in the amended Articles.

Part of the staff’s preparation for the activation of the SDR facility involved a special seminar on reserves. Because of the importance of the matter, and because so many experts had been suggesting a variety of views and techniques, the staff had proposed in 1968 that a round table or seminar on the subject of appraising world reserve requirements be held between the staff and academic specialists. The Executive Board had approved this proposal, and when the sessions were later held many Directors attended. In the course of 1968, however, the onrush of events accelerating activation of the SDR facility overtook the timing of the seminar, and it was not held until June 1–3, 1970, some eight months after the size of the allocations of SDRs had been agreed and five months after the first allocation had actually been made.

A brief digression to describe the seminar is, nonetheless, apropos. Twenty-two academic scholars from various parts of the world participated; economists from governmental institutions and commercial banks were not asked to attend on the ground that their positions would be taken to reflect the official views of their organizations. The seminar dealt with a wide variety of topics: the key issues in estimating the need for general reserve supplementation; the need for reserves by a single country; the practical techniques for assessing the need for world reserves; the relationship between international liquidity and balance of payments adjustment; and the bearing of the supply of other reserves on the need for SDRs.

For the staff it was particularly noteworthy that the academic specialists either broadly agreed with, or did not contest, the basis that the Fund had used for estimating reserve needs as a prerequisite to activating the new facility. The papers and proceedings of the seminar, together with several papers that the staff had prepared earlier in connection with activation, were published by the Fund.4

Consultations Process Begins

When the Executive Directors began in June 1969 in informal session to consider the possibility of activating the SDR facility, they were generally agreed that it was necessary to move rapidly if they did not want to be presented with a decision already taken by the Group of Ten. The Managing Director therefore put before them a statement for discussion at an informal session in July in which he indicated that the Fund was approaching attainment of the provision that members having 75 per cent of total quotas must deposit instruments of participation in the Special Drawing Account, and in which he stressed that, in his view, it would be unwise to delay any longer consideration of activation of this facility. Believing that considerable progress had been made toward a consensus that SDR allocations should begin and on the general magnitude of such allocations, and believing that in due course he would find the broad support on which to base a proposal for allocation, he suggested the ingredients of a proposal.

The first decision to allocate SDRs should be taken by the Board of Governors at the forthcoming Annual Meeting. Because this first decision would be one of the most momentous so far taken by the Board of Governors, it was proper that it be done in the course of the Annual Meeting, when Governors would have an opportunity to discuss the proposal. Mr. Schweitzer believed further that the decision by the Governors should not be merely a decision in principle to activate the facility but one that contained all the elements necessary to bring about allocations of SDRs during the first basic period. Thus, the decision would specify the start and the duration of the first basic period, the rates of allocation in terms of percentages of quota, the dates as of which quotas would be used as the basis for these percentages, the dates when allocations would be made, and any other aspects of the allocation plan for the first basic period. He suggested a basic period of five years, with allocations to begin late in 1969 or at the beginning of January 1970 and, on the basis of the staff’s calculations, proposed allocations in the middle of a range of $2.5 billion to $4 billion a year. He also thought that there would be a good case for some addition to these amounts at the beginning of the period to compensate for the slow growth of global reserves and the decline in official gold holdings in the last few years, an idea referred to initially by the staff and, as the discussions progressed, also by the Executive Directors, as “front-loading.” In effect, the Managing Director was beginning the process of consultation that must precede his making a proposal to allocate SDRs.

Most Executive Directors agreed with the general tenor of the Managing Director’s suggestion. However, Mr. Dale (United States) argued for larger annual allocations. Although he started from the same point of departure as the staff—that is, a future need for world reserves in the range of $4 billion to $5 billion a year—he did not wish to make the same downward adjustments as the staff had made for increases in reserves in the form of foreign holdings of U.S. dollar balances. The U.S. authorities did not want to assume that their dollar liabilities would increase in this way and in these amounts. Hence, Mr. Dale arrived at a minimum of $4.5 billion a year, a figure that was regarded by the U.S. authorities as the minimum appropriate one.

Mr. Plescoff (France) considered the timetable suggested by the Managing Director unrealistic. He noted that France had not yet become a participant in the Special Drawing Account, although it would be discussing such action in ten days’ time at the next meeting of the Finance Ministers of the eec countries, nor had it yet ratified the amendments to the Articles.

Tie-In with Quota Review

The fifth general review of quotas was also beginning to get under way.5 Several Executive Directors urged that the magnitudes of the amounts involved in the two exercises—allocation of SDRs and increases in quotas—be considered more or less in concert. As the discussions continued, it became clear that the Executive Directors for some industrial countries, while willing to see the SDR facility activated, might then be inclined to cut back on quota increases. Mr. Madan (India), speaking at some length, presented the contrasting view of the developing members. Like the industrial countries, they, too, had been adversely affected by the steady erosion over the years in the supply of world liquidity, as evidenced in the shrinking proportion of reserves to imports or to international payments and the consequent retreat from freedom and multilateralism of international trade and capital movements. The developing members were definitely interested in the activation of the new facility. Nonetheless, they also wanted adequate provision to be made for an increase in conditional liquidity through a sizable expansion of Fund quotas. Furthermore, having in mind the strong hints from the members of the eec that their quotas in the Fund ought to be greatly enlarged so as to reflect their enhanced economic position in the world, Mr. Madan said that the developing members would be opposed to appreciably large special readjustments in the structure of Fund quotas if these were detrimental to the developing members as a whole. Messrs. Phillips O. (Mexico), Kafka (Brazil), Escobar (Chile), Byanti Kharmawan (Indonesia), Léon M. Rajaobelina (Malagasy Republic, Alternate to Mr. Yaméogo, Upper Volta), and other Executive Directors for developing members agreed with Mr. Madan, wanting assurance that, when the decision was taken to activate the SDR facility, there would still be a satisfactory outcome of the quota review.

A way out of the dilemma was found mainly by shortening the first basic period for allocation of SDRs. The idea that the first basic period need not run for the full five years envisaged as normal had been expressed by the Deputies of the Group of Ten at their meetings in June, and the same idea was voiced in the Executive Board by Messrs. Guenther Schleiminger (Federal Republic of Germany), Stone (Australia), and Suzuki (Japan). But the dilemma was also resolved by lowering the magnitudes of both SDR allocations and quota increases.

Consensus on Amounts and Period

When attention turned to the amounts of SDR allocations and the length of the basic period that could be agreed upon, it was evident that some of the eec countries considered excessive the Fund staff’s estimates of global reserve needs. At the end of July the Managing Director informed the Executive Board that the Deputies of the Group of Ten had, subject to the approval of their Ministers, reached a consensus that they would support an eventual proposal for the activation of the SDR facility for an amount equivalent to $9.5 billion over a period of three years, on the basis of $3.5 billion for the first year and $3 billion for each of the two subsequent years. The Managing Director’s representatives at the relevant meetings of the Deputies explained the circumstances to the Executive Board. At a morning meeting of the Deputies on July 24, the countries not in the eec had continued to favor five years for the first basic period of allocation. The amounts these Deputies had preferred covered a wide range, some favoring $2.5–3 billion a year, others preferring $4–4.5 billion a year. The eec countries, however, had wanted only $2.5 billion a year for three years. By the time the Deputies assembled for the afternoon meeting, a consensus had been reached.

The Managing Director was thus assured that he had the support required to go ahead with a proposal to allocate.

Proposal Formulated

In August 1969, after the staff had had a chance to put together the main operative provisions of a first decision to allocate SDRs, the Executive Directors resumed their consideration of activation, again in informal session. Much of their discussion centered on how to translate the absolute amounts to be allocated into percentages of quota as required by the Articles. The three yearly allocations that had been agreed upon by monetary authorities—SDR 3.5 billion, SDR 3.0 billion, and SDR 3.0 billion—were more difficult to convert into percentages of quota for each participant than they would otherwise have been because the aggregate of participants’ quotas was expected to be enlarged during the first basic period as a result of the general review of quotas then under way. Another complication was that, once the percentages of quota had been determined on the basis of total participation by all participants, the opting out by one or more participants would reduce the absolute amount of the total allocation concerned. In addition, provision had to be made for the receipt of SDRs by new participants joining the scheme, either between the time of the decision to allocate and the time of the first allocation, or later during the first basic period.

Part of the solution was for the Fund to use the authority it had under the amended Articles to let allocations and percentages be as of dates other than the date of the decision to allocate. It was proposed that the allocations to be made on January 1 of 1970, 1971, and 1972 should be based on the quotas of participants on the day before those dates, that is, December 31, 1969, December 31, 1970, and December 31, 1971, rather than on the quotas existing on the date of the decision to allocate, that is, October 3, 1969. The rest of the solution was to specify that the percentages worked out originally (17.5 per cent for the first allocation and 15 per cent for the second and third allocations) would be adjusted later so as to result in allocation of the agreed absolute amounts to participants that were members of the Fund on December 31, 1969. If new members joined the Fund and became participants in the Special Drawing Account, total allocations might increase beyond these amounts.

The Executive Directors took up a draft of a specific proposal by the Managing Director to allocate SDRs in the first basic period along these lines early in September 1969. Generally they favored it. They considered three years for the first basic period instead of five years to be justified, although they recognized, and some regretted, that the Managing Director had so restricted his proposal because of the preference of certain members. On September 12, the Executive Board formally concurred in the Managing Director’s proposal for a first basic period of three years beginning January 1, 1970, with allocations to be made on January 1 of 1970, 1971, and 1972.

Some Serious Reservations

Despite the ready concurrence of the Executive Board and, later, of the Board of Governors in the Managing Director’s proposal to activate the SDR facility, there had been some drama. Mr. Plescoff did not concur in the proposal: France, he stressed, had not yet taken a position on activation and was not yet a participant in the Special Drawing Account. By the time of the Annual Meeting, however, France had concurred in the proposal, and it became a participant at the end of 1969.

Mr. Stone abstained. In his personal view, and he stressed the point that this view was not shared by his Australian or New Zealand authorities, the provisions of the Articles requiring that before activation there should be attainment of a better balance of payments equilibrium and there should be the likelihood of a better working of the adjustment process in the future had not yet been met. He referred to reports on the Article VIII consultations with the United Kingdom and the United States that had been discussed in the Executive Board only a few months before.

In June, when the Executive Board had considered the request of the United Kingdom for a stand-by arrangement and had simultaneously taken up the 1969 consultation under Article VIII, Mr. Stone had voiced his uncertainty about the U.K. economy. Although the staff paper and most of the Executive Directors’ views pointed to a boom in the United Kingdom, Mr. Stone suspected that certain recessive tendencies were developing. If so, the United Kingdom would be in the economically anomalous position of having a continuing external deficit together with an underemployment of domestic resources.

But it was in regard to the economy of the United States that Mr. Stone had had the most serious misgivings. In July, when the Article VIII consultation with the United States had come before the Executive Board, Mr. Stone had underscored the staff view that control of inflation in the United States was vital to checking the inflationary bias of the world economy, and that a strengthening of the U.S. balance of payments was a basic prerequisite for improving the international adjustment process and for restoring widespread confidence in the soundness and effectiveness of the international monetary system. Therefore, he had addressed himself to two questions which he regarded as pertinent to activation of the SDR facility: To what extent, as far as the U.S. economy was concerned, had a better balance of payments equilibrium been attained? To what extent was it reasonable to make the judgment, with regard to the U.S. economy, that there was a likelihood of a better working of the adjustment process in the future?

Mr. Stone analyzed at some length not only the separate elements of the U.S. balance of payments—the projected trade surplus for 1969, the relation between imports and estimated gross national product, the travel account and investment income flows, and the movements of capital—but also details of the U.S. domestic economy, and he concluded that the U.S. payments position was more unfavorable than it had been and that there had not been any improvement in the domestic sector of the economy. Furthermore, he found no convincing evidence that there was likely to be a better adjustment of the external position in the future.

Approval by Board of Governors

On October 3, 1969, at the Twenty-Fourth Annual Meeting, in Washington, the Board of Governors adopted a resolution approving the Managing Director’s proposal to allocate SDRs.6 While the Governors for the United Kingdom and the United States expressed “wholehearted” and “full” support, respectively, for the activation of the SDR facility, the Governor for France was much less enthusiastic: France, he said, had gone along because the facility was in effect anyway and because France wanted to help to make certain that the new experiment was “managed in a rational fashion.”7

The fact that the Unctad’s Expert Group on International Monetary Issues had just met again in New York and had recommended the establishment of a link between SDRs and additional development assistance undoubtedly influenced the tenor of the remarks made at the Annual Meeting by the Governors for the developing members. Among the Expert Group had been, for example, Mr. Carlos Massad A., Governor for Chile, and Mr. Yaméogo, an Executive Director elected by several African members. While the Governors for the developing members expressed general satisfaction with the basis for the allocation of SDRs as proposed by the Managing Director, several of them urged that the opportunity be taken to do more to augment the financial aid available for development. For instance, Mr. L. K. Jha (India) urged that the whole question of a formal link between the creation of international liquidity and development finance, which had been shelved, be considered afresh.8

Mr. Colombo (Italy) reminded his colleagues that a year earlier he had suggested that, “following each allocation of SDRs, the major industrial countries should agree to make, in a manner to be agreed upon, a contribution to the ibrd or ida equivalent to a portion of each country’s SDR allocation.”9 He continued to believe that it was worthwhile to examine the possibility of implementing this proposal. Several Governors for the developing members—among them Mr. Nawab Mozaffar Ali Khan Qizilbash (Pakistan), Mr. Ali bin Haji Ahmad (Malaysia), and Mr. Yadav Prasad Pant (Nepal)—seconded Mr. Colombo’s suggestion.10

While some Governors for major industrial members continued to object to any specific link between reserve creation and development finance, others, such as Messrs. Roy Jenkins (United Kingdom) and Janko Smole (Yugoslavia), who were less concerned with a concrete link between SDRs and development aid, made it plain that they wished the more prosperous members to understand that the agreed allocation of SDRs would be expected to ease the transfer of resources from the richer to the poorer parts of the world.11 Sharing this view, Mr. Schweitzer said that “conditions should now be favorable for a major improvement in the volume and quality of development aid and for a decisive check to regressive tendencies in trade and payments liberalization.”12

The decision to activate the SDR facility greatly speeded up the rate at which Fund members became participants in the new arrangements. During the week of the 1969 Annual Meeting alone the number of participants grew from 68 to 74, and in the next three months 31 members deposited their instruments of participation, so that at midnight of December 31, 1969 there were 105 participants. Only 10 of the Fund’s members—Ethiopia, Iraq, Kuwait, Lebanon, the Libyan Arab Republic, Nepal, Portugal, Saudi Arabia, Singapore, and Thailand—had not become participants by the end of 1969.

A Word in Retrospect

In view of the veritable explosion that took place in world reserves in 1970 and 1971, we may call attention here a little more fully to the reasons underlying the decision to activate the SDR facility. The official reasons were spelled out in the Annual Report for 1969 and in the Managing Director’s report to the Board of Governors containing his proposal to allocate SDRs in the first basic period.13 In addition, in an unusual instance of a full exposition of the background for a decision taken in the Fund, the staff’s thinking that underlay the SDR allocations was published as part of the papers and proceedings of the 1970 seminar on reserves.14

The report containing the Managing Director’s proposal probably has the best explanation. In sum, that report reviewed the tight reserve situation then prevailing, noting that reserves had declined by over 50 per cent relative to world trade since the early 1950s. Admittedly it was difficult to judge the adequacy of the existing level of reserves, and the signals after about 1964 had been conflicting. Although world output and international trade had been expanding, despite declining reserves, there had, on the other hand, been increased reliance on restrictions and increased recourse to international financial assistance, including use of the Fund’s resources, to meet payments deficits and to sustain reserves. The momentum of trade liberalization had also slackened. Above all, measures to restrict, attract, or, occasionally, repel capital flows had been applied or intensified for payments reasons in many countries, large and small.

Regarding the relationship between reserves and the adjustment process, the report stated that it appeared unlikely that reserve creation would significantly increase the imbalances of those countries which in the past had had the biggest deficits. The United States and the United Kingdom were under such strong pressure to correct their deficits that any relief afforded by a general expansion of reserves was likely to be negligible. The need to repay a large amount of indebtedness in a rather short period of time was likely to compel the United Kingdom to adopt policies that might even exceed the requirements of long-term adjustment. In the United States, the need to contain inflationary pressures would of itself be expected to induce the authorities to pursue demand management policies tending to strengthen the current account of the balance of payments. The measures being applied by the United States and the United Kingdom, as well as by France, then also in deficit, were specifically noted.

In these circumstances, the report went on, the supplementation of reserves would be most unlikely, on balance, to exercise any adverse effect on the adjustment process, and indeed if nothing were done to supplement reserves, the stabilization efforts that were being made by deficit countries might be frustrated by the defensive measures of others. In any event, a three-year interval, rather than a five-year one, had been used for the first basic period because estimation of reserve needs for five years ahead had been particularly difficult.

The balance as measured by the changes in U.S. official holdings of gold and convertible currencies, in liquid and certain nonliquid liabilities to foreign central banks and governments, and in the U.S. accounts with the International Monetary Fund. During the years covered in this history, the official settlements basis as a measure of the U.S. balance of payments position was distinguished from the liquidity basis, which took into account changes in liquid liabilities to all foreign entities, including private commercial banks.

These developments in France and the Federal Republic of Germany are discussed below in Chaps. 18 (p. 352) and 22 (pp. 449–50 and 458–60).

Opening Address by the Managing Director, Summary Proceedings, 1969, pp. 9–10.

International Reserves: Needs and Availability, papers and proceedings of a seminar at the Fund (Washington, 1970).

Chap. 16 deals with this review of quotas.

Resolution No. 24-12; Vol. II below, pp. 262–63.

Statements by the Governor of the Fund for the United Kingdom, the Governor of the Fund and the World Bank for the United States, and the Governor of the World Bank for France, Summary Proceedings, 1969, pp. 35, 52, and 58.

Statement by the Governor of the Fund for India, Summary Proceedings, 1969, p. 73.

Statement by the Governor of the Fund for Italy, Summary Proceedings, 1969, p. 71.

Statements by the Governors of the World Bank for Pakistan and Malaysia and the Governor of the Fund for Nepal, Summary Proceedings, 1969, pp. 22, 44–45, and 157–58.

Statements by the Governor of the Fund for the United Kingdom and the Governor of the World Bank for Yugoslavia, Summary Proceedings, 1969, pp. 36 and 208.

Concluding Remarks by the Managing Director, Summary Proceedings, 1969, p. 250.

Annual Report, 1969, Chap. 2, and A Report to the Board of Governors of the International Monetary Fund Containing the Managing Director’s Proposal on the Allocation of Special Drawing Rights for the First Basic Period (Washington, 1969); the latter is reproduced in Vol. II below, pp. 251–65.

International Reserves; cited above in footnote 4 of this chapter.

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