Chapter 11: Preparing for SDR Allocation (1969)
- International Monetary Fund
- Published Date:
- February 1996
Numerous Decisions of considerable importance had to be taken before SDRs could be allocated and put into use. Which currencies would be declared convertible in fact? How should the general principles governing designation of participants to receive transfers of SDRs be implemented? What particular plan for designating participants should be put into effect for the first quarter of 1970? How far should the Fund go in exercising its authority to accept SDRs in lieu of gold and members’ currencies in its General Account?
As has been seen in the foregoing chapters, the step-by-step progress toward establishment and activation of the SDR facility involved numerous discussions and decisions by the Executive Board, the Group of Ten, and the Board of Governors. By contrast, the decisions that were necessary before the first allocations of SDRs could actually be made were taken, quite easily, by the Executive Board alone. Working in close cooperation, and with élan and an eagerness to make the SDR an effective instrument, the Executive Directors, including the Executive Director for France, took all the decisions necessary to give SDRs a fine start. In this the Executive Directors played a special and unique role in the establishment of the new facility.
Indeed, the last few months of 1969 were for the Executive Board more productive than any comparably short period in the six years reviewed in this history. While working intensively on the several new and difficult points that had to be settled before SDRs could be allocated, they were resolving other unusually troublesome issues as well—notably, the quota increase of 1970 and the South African gold problem.1
Specifying Currencies Convertible in Fact
How Many Should There Be?
The question of which currencies should be declared convertible in fact, at least initially, had to be decided by the Executive Board before the date of the first allocation of SDRs, that is, before January 1, 1970. To make matters more complex, there were two categories of currencies convertible in fact. First, there were what were referred to as interconvertible currencies, those under Article XXXII (b) (1). These currencies were subject to the strictest test: in effect, issuers of currencies that were declared interconvertible guaranteed to convert their currencies at agreed rates of exchange into any other currencies declared interconvertible. Second, there were currencies that would not themselves be interconvertible but which would be convertible, under Article XXXII (b) (2), into at least one of the interconvertible currencies. The two types of currencies convertible in fact were referred to as Article XXXII (b) (1) and Article XXXII (b) (2) currencies.
It was with regard to the former—the interconvertible currencies—that the most difficulty existed. Here, two specific questions needed to be answered: what precise procedures would be required to ensure the interconvertibility of currencies declared to be convertible in fact under Article XXXII (b) (1), and how many currencies should be Article XXXII (b) (1) currencies, that is, should be interconvertible. Mr. Plescoff had already asked for a paper setting forth the staff’s views on the criteria that the Fund should apply for satisfactory conversion procedures for an Article XXXII (b) (1) currency, and Mr. Dale had indicated reservations regarding such procedures.
In a memorandum sent to the Managing Director at the end of October 1969, the staff explained that the U.S. authorities, in the interests of keeping their own monetary arrangements simple, did not wish to have to introduce procedures for acquiring currencies that they might not otherwise hold in their reserves. Under the interconvertibility arrangements of the Articles, if a transferor of SDRs received U.S. dollars from a transferee, the United States would be obliged to convert those dollars into any other Article XXXII (b) (1) currency that the transferor might want. For ease of operation, the U.S. authorities preferred to keep the number of interconvertible currencies as small as possible.
On the other hand, the French and the Italian authorities had maintained during the negotiations leading to the SDR facility that some participants, countries in the French franc area, for instance, might want to exchange their SDRs for currencies other than the U.S. dollar. Therefore, a system of using only the U.S. dollar would not work smoothly because participants that did not hold or use dollars would have to make their own conversion arrangements.
The staff suggested a way out of this dilemma. In transactions subject to designation (the only type for which this problem of conversion existed), participants should be able to exchange SDRs, at appropriate rates of exchange, for their main reserve currency, which was normally also the currency they used in daily transactions. In turn, participants taking the SDRs should normally be able to satisfy their obligation to give currency by providing their principal reserve currency.
The staff further suggested that the participant’s initiative to have its currency declared convertible in fact should take the form of a letter to the Fund describing the existing procedures for convertibility and containing a declaration of intent stating that all necessary conversions involving SDR transactions would be made in accordance with these procedures.
At first, only the United Kingdom and the United States proposed to make their currencies convertible in fact in the interconvertible sense of Article XXXII (b) (1). Mr. Seitaro Hattori (Japan, Alternate to Mr. Suzuki), Mr. Robert Johnstone (Canada), Mr. Lieftinck (Netherlands), Mr. Palamenghi-Crispi (Italy), and Mr. Schleiminger (Federal Republic of Germany), in fact, explicitly stated that their authorities were not intending to establish Article XXXII (b) (1) status for their currencies. They did not regard this kind of status for the currencies of their countries as a matter of prestige. On the contrary, there was a disadvantage, since the position of a currency convertible in fact was similar to a reserve currency. They believed, moreover, that the successful functioning of the SDR system would be very much aided if the number of interconvertible currencies was kept fairly small. Mr. Bruno de Maulde (France, Alternate to Mr. Plescoff) remarked that he had not been able to detect any keen interest among his authorities for making a declaration regarding the French franc.
While Mr. Schleiminger and some other Directors were willing to have a single Article XXXII (b) (1) currency, Mr. Lieftinck reported that the Netherlands authorities saw some merit in having more than one. It would be unwise to have many such currencies, as that would allow for more speculation than was desirable, but it would be advantageous to have one or two currencies additional to the U.S. dollar in a backup role. Otherwise, if something happened to a reserve currency, and it was the only one convertible in fact under Article XXXII (b) (1), it would be difficult for authorities in other countries to switch to a second reserve currency if that second country had not yet developed the practices and arrangements required for the easy functioning of the SDR system. Consequently, the Netherlands authorities favored having more than one currency convertible in fact from the outset.
The staff explained what it considered to be the advantages of a limited number of currencies or even of a single currency under Article XXXII (b) (1), from the point of view of the operation of the scheme. A single currency would simplify operations in SDRs. A designated participant would provide that currency and no other, and a user of SDRs would always know which currency it would receive from a designated participant. The user of SDRs would be able to make arrangements for conversion of the currency received into any other currency it might want to obtain. The disadvantage was that the user of SDRs would not enjoy an exchange rate prescribed by the Fund for that conversion.
At the end of the Executive Board’s discussion, the Managing Director made a strong plea for participants wishing their currencies to be convertible in fact under Article XXXII (b) (1) to inform the Fund as soon as possible, in order to provide sufficient time for the arrangements to be submitted to the Executive Board and for members to know by January 1, 1970 which currencies would be available in return for SDRs.
Three Interconvertible Currencies and Five Additional Currencies Convertible in Fact
On December 31, 1969, the day before the first allocations of SDRs were to be made, the Executive Board considered a staff memorandum containing a letter from the Secretary of the U.S. Treasury advising the Fund of the intention of the U.S. authorities that the dollar should be a currency convertible in fact, and took a decision that the U.S. dollar was a currency convertible in fact in accordance with Article XXXII (b) (1), that is, that it was interconvertible.2
In February 1970 the Executive Board considered similar letters from the Governor of the Bank of England and the Director of Treasury of the French Ministry of Economy and Finance, as well as memoranda received by the Managing Director from the British and French authorities in January, advising of the intentions of these countries that the pound sterling and the French franc should be currencies convertible in fact in accordance with Article XXXII (b) (1). Contemporaneously, the Executive Board had before it letters to the Managing Director from the appropriate authorities and accompanying memoranda advising of the intention that the Belgian franc, the deutsche mark, the Italian lira, and the Mexican peso should be currencies convertible in fact in accordance with Article XXXII (b) (2), that is, that these currencies should not be interconvertible but should be convertible into at least one of the interconvertible currencies.
The staff explained what the Fund’s concurrence in these intentions would mean for the conversion of SDRs. There would be three currencies convertible in fact under Article XXXII (b) (1), that is interconvertible: the U.S. dollar, the pound sterling, and the French franc. The U.S. authorities had entered into arrangements with the United Kingdom and France under which the United States could acquire at any time sterling or French francs in order to arrange for the conversion of U.S. dollars received by the transferor of SDRs into sterling or French francs, as the case might be. The United Kingdom and France, for their part, would use procedures that already existed in their countries, that is, they would draw on their dollar balances, or sell gold and acquire dollars, should conversion of their currencies into U.S. dollars be needed. Arrangements had also been made between the United Kingdom and France so that each of those countries could arrange for conversion of their respective currencies whenever that should be necessary in connection with an SDR transaction.
The staff noted that if the Executive Board decided that the proposed currencies would be declared convertible in fact, there would be seven currencies in which the designated participants could fulfill their obligations to provide currency in return for SDRs. The Executive Board would also have to take decisions on the representative exchange rates at which conversions would take place. Those rates would serve as the exchange rates prescribed by the Fund in any transaction or operation connected with SDRs.
In February 1970 the Executive Board took a series of decisions regarding these currencies and the representative exchange rates.3 The Netherlands Government subsequently requested the Fund to make similar arrangements for the guilder, and in March 1970 the Executive Board decided that the Netherlands guilder was a currency convertible in fact under Article XXXII (b) (2) and specified the method to be used to determine the necessary representative rate.4 In August 1970 the Fund took note of a change in the procedure for the conversion of sterling, but sterling continued to be a currency convertible in fact in accordance with Article XXXII (b) (1). In May 1971, after a floating rate was introduced for the Netherlands guilder, the Fund took a second decision on the representative exchange rate for that currency.5
First Designation Plan
Under the new SDR facility the Fund was to ensure that a participant would be able to use its SDRs by designating participants to provide currency for specified amounts of SDRs. Rules for designation during the first basic period of allocation of SDRs were specified in the Articles, and the Rules and Regulations provided that at quarterly intervals the Executive Board should decide on a plan by which designations would be made.
General Techniques and Principles
Before the Board began its consideration of a first designation plan, the staff circulated a paper proposing a basis on which to establish quarterly designation plans. The speed with which transactions in SDRs were required to be carried out would make it difficult for the Executive Directors for participants subject to designation to be consulted at the time of a transaction, as was the procedure when a member’s currency was drawn from the Fund’s General Account.6 The staff suggested, therefore, that some time before the end of each calendar quarter it would propose to the Executive Board a quarterly plan consisting of a list of participants to be designated and the maximum amounts for which each could be designated during the quarter without discussion or decision on individual transactions. After discussing the composition of the list and the amounts designated for each participant and after making any modifications it thought appropriate, the Executive Board would take a decision adopting the plan. This decision would govern designations until an amended plan, or the next quarterly plan, was adopted. Since unexpected changes in a participant’s balance of payments and reserve position might warrant adjustment of the plan, the Board would have to review and, if necessary, amend the plan should the Managing Director, an Executive Director, or a participant so request. If at any time it appeared likely that the use of SDRs during a given calendar quarter might exceed the balance of the amount provided in an initial plan, the staff would propose a new plan for action by the Executive Board.
The following considerations guided the staff in proposing a designation plan for the first quarter, January 1–March 31, 1970.
First, the total amount provided should be large enough so that supplementary designation plans during the quarter would not ordinarily be necessary. Although the total amount for the first plan was largely a matter of conjecture, the staff proposed SDR 350 million, that is, 10 per cent of the first allocation.
Second, two groups of participants would be listed: (1) those considered to have a sufficiently strong balance of payments and reserve position, and (2) those that would receive SDRs to promote reconstitution or to reduce a negative balance of SDRs. The selection of a participant for the first group required a judgment as to its financial strength. The figures reported in the Fund’s monthly statistical bulletin, International Financial Statistics (IFS), were taken as fulfilling the definition of “official holdings of gold and foreign exchange” for the first designation plan (Schedule F of the Articles), but the staff considered that this definition would have to be further explored. In like manner, as a preliminary measure of reserve strength, the staff used a participant’s ratio of reserves to its Fund quota for the first plan, but realized the need to search for a better index.
Third, in drawing up the first plan the staff was guided by the consideration that the number of designees should be large. A wide distribution of SDRs was in conformity with the concept of collective responsibility for the SDR scheme. Also, the greater the distribution of SDRs the more equally would any holdings of SDRs that were considered excessive be shared among participants.
Fourth, although all participants subject to designation were supposed to be included in the quarterly plan, the staff thought that, from an operational standpoint, the list of designees should, in practice, be confined to those that would be designated for at least SDR 1 million.
Fifth, the staff proposed that the amounts for designation in the first plan be, simply, a fixed percentage of official gold and foreign exchange holdings, the same percentage applying to each designated participant. While subsequent designation plans would have to be designed so as to promote a “balanced distribution” of SDRs, as provided in the Articles, the ratios of excess holdings of SDRs to official holdings of gold and foreign exchange at the onset of operations were equal (that is, zero) for all participants. Determination of the amounts for designation in later plans would be more complex as these ratios became unequal. Efforts toward harmonization of the composition of participants’ reserves would then be necessary.
Sixth, the staff thought that it would be desirable for the Fund to have advance information from prospective users of SDRs so that it could, in turn, give some prior notice to the participants designated.
First Plan Approved
In December 1969, the Executive Board discussed the staff’s proposals for a first quarterly designation plan. The Directors recognized the difficulties of determining the candidates for designation and of drawing up a specific plan. A balance had to be struck between the desire for automaticity in the working of a plan and the need for flexibility as the new mechanism was being tried. Gradually, as had happened with the currency budgets for the use of currencies in purchases and repurchases through the Fund’s General Account, cumulative experience with SDRs would help with the compilation of designation plans and with actual designation within these plans. Meanwhile, most of the Executive Directors favored the staff’s learn-as-you-go approach. Hence, the first designation plan, listing 23 participants, both industrial and developing countries, subject to designation for a maximum total of SDR 350 million, was agreed to with relative ease by most of the Executive Directors.
Messrs. Palamenghi-Crispi, de Maulde, and Lieftinck would have gone along with a figure somewhat higher than SDR 350 million, while Mr. Suzuki considered SDR 350 million too high. The Managing Director explained that the aggregate figure was the outcome of the judgment not of how many SDRs should or could be used but of how many SDRs were likely to be used. It was in no way any kind of a limit. The staff observed that, if it were to propose an amount that overestimated the probable use of SDRs, members might be inconvenienced because they would have to rearrange their foreign exchange resources so as to take account of the higher amounts for which they might be liable.
Mr. Saad (Egypt) abstained from approving the plan. He explained that he had found it difficult to advise the members that elected him whether or not they should even become participants in the SDR scheme; four of the nonparticipants were among the countries that had elected him. He believed that there was no objective standard for designation, and most of his countries had large reserves. There was some question, he thought, as to what constituted a deficit in the balance of payments and what weight should be put on the reserves of a member, or on its levels of exports and imports. The criterion being used to judge strong reserves was a country’s annual imports. Some small countries, however, might need to accumulate reserves, and their reserve strength was not necessarily related to the level of their annual imports.
Acceptance of SDRs for Charges and Repurchases
The Executive Board took yet another important decision with regard to the SDRs in December 1969. In a further effort to make SDRs an acceptable reserve, it authorized the Fund to go as far as it legally could to receive from participants their newly acquired SDRs without limitation for the payment of charges due to, and for voluntary repurchases from, the General Account.7
The Articles required the Fund to accept SDRs in compulsory repurchases and in reimbursement of the Fund by participants for the expenses of conducting the business of the Special Drawing Account, and authorized the Fund to accept SDRs in payment of any charges that arose from operations and transactions conducted through the General Account and in voluntary repurchases of participants’ currencies held in the General Account. The question now was whether the Fund would use this authority.
The staff had hesitated to come forward with what might be considered to be a radical proposal, but finally decided to do so. The Fund’s willingness to accept SDRs to the greatest extent possible, reasoned the staff, not only would help to establish the new unit but would be a convenience for both members and the Fund. Should SDRs not be acceptable to the Fund for voluntary repurchases, a member with a balance of payments need could use them nonetheless to obtain whatever currency was needed, as indicated in the Fund’s currency budget, to repurchase from the General Account. Direct acceptance by the Fund of SDRs would be less cumbersome. Moreover, the SDRs acquired by the Fund in this way would be useful since the Fund was permitted under the Articles to disburse SDRs in various ways. The Fund could also, if it found this to be necessary or desirable, use SDRs held in the General Account to replenish its holdings of the currency of any participant. In effect, the Fund would gain an asset that it could use in a manner similar to gold.
In considering the staff’s proposal, some of the Executive Directors for European countries, although eager to build up the status of SDRs as being on an equal footing with other reserves, at first expressed concern about the future liquidity of the Fund. An excessive flow of SDRs from participants to the General Account might jeopardize, rather than help, the standing of the new asset. These Directors raised questions about the uses that could be made of SDRs that accumulated in the General Account. A few Directors suggested that participants might obtain guidance from the Fund on the amount of SDRs that could be used in voluntary repurchases, similar to the guidance given in the Fund’s currency budgets on the currencies to be used in repurchases. The staff, however, underlined the similarity between SDRs and gold: members did not consult the Fund on the use of gold in repurchases. The Managing Director stated that he could not visualize an acceptable means of guidance for the use of SDRs in repurchases. What criterion, for instance, would govern the volume of SDRs that the Fund should accept in repurchases? If it was judged that too many SDRs had been received, would the Fund stop accepting them?
The Executive Directors went along with the staff’s proposal with relatively little debate. Experience alone would indicate the amount of SDRs that would be desirable for the Fund to receive. Moreover, the decision was to be reviewed during the course of 1970, after the SDRs had been in use for a time. Meanwhile, it would do no harm for the Fund to accept some SDRs. Their decision was influenced in part by their realization, as they undertook the fifth general review of quotas, that the amount of gold the Fund would receive when quotas were increased might be limited.
Shortly thereafter the Board took a decision, without meeting, to reword the text of stand-by arrangements so as to note that repurchases could be made not only in gold or convertible currencies acceptable to the Fund, the way repurchases in stand-by arrangements had previously been stated, but also in SDRs in accordance with whatever Fund policies and practices were prevailing at the time of repurchase.8
Exclusion from Monetary Reserve Calculations
On December 18, 1969, the Executive Board decided also that, at least for the fiscal year ended April 30, 1970, calculations of members’ monetary reserves for the purpose of determining compulsory repurchase obligations should not include the increase in reserves resulting from the first allocation of SDRs.9 The staff proposed this exclusion of SDRs from monetary reserve data on the grounds that members had received unexpected new reserves and had not yet had time to use them, or even to plan their use. Later on, a general decision might be taken on whether or not increases in monetary reserves resulting from SDR allocations should be taken into account in determining repurchase obligations.
As it happened, the Executive Board, in April 1970, decided that for the fiscal years ended April 30, 1971 and 1972 increases in monetary reserves resulting from allocations of SDRs again would not be taken into account in calculating monetary reserves and increases in them during those years.10 While there were finely balanced arguments both in favor of and against such exclusion, the staff’s proposal in favor of exclusion of SDRs from monetary reserves data was based largely on the argument that the Fund had a number of other ways to ensure that repurchases would take place; hence, it was unnecessary to use the newly allocated SDRs in a way to make members fulfill their repurchase obligations to the Fund. Messrs. C. P. C. de Kock (South Africa, Alternate to Mr. Stone), Lieftinck, and van Campenhout (Belgium) dissented from this second decision, contending that, for the purpose of calculating repurchase obligations, no distinction should be made between SDRs and other reserves: the Fund and its members considered SDRs part of reserves.
Because of the difference between the date of an SDR allocation, January 1, and the date of the end of the Fund’s fiscal year, April 30, some related decisions were taken as well to clarify the precise amounts of SDRs that would be excluded.11
After the various decisions described in this chapter had been taken, the staff prepared a Manual of Procedures to guide participants in the use of their newly acquired SDRs. The Manual was approved by the Executive Board and sent to the fiscal agencies and depositories of participants.12
E.B. Decision No. 2918-(69/128) S, December 31, 1969; Vol. II below, p. 220.
E.B. Decisions Nos. 2955-(70/8) S, 2956-(70/8) S, 2957-(70/8) S, 2958-(70/8) 5, 2959-(70/8) S, 2960-(70/8) S, 2961-(70/8) S, 2962-(70/8) S, 2963-(70/8) S, 2964-(70/8) S, 2965-(70/8) S, and 2966-(70/8) S, all dated February 2, 1970 and reproduced in Vol. II below, pp. 220–22.
E.B. Decisions Nos. 2988-(70/19) S and 2989-(70/19) S, March 5, 1970; Vol. II below, pp. 222–23.
E.B. Decision No. 3338-(71/44) S, May 19, 1971; Vol. II below, p. 223.
The procedures for selecting the currencies to be used in transactions and operations through the General Account are described in Chap. 17 below, pp. 322–26.
E.B. Decision No. 2901-(69/122) G/S, December 18, 1969, pars. 2 and 3; Vol. II below, p. 218.
E.B. Decision No. 2944-(70/3) G/S, January 14, 1970; Vol. II below, p. 218.
E.B. Decision No. 2901-(69/122) G/S, December 18, 1969, par. 1; Vol. II below, p. 217.
E.B. Decision No. 3034-(70/38), April 29, 1970; Vol. II below, p. 217.
E.B. Decisions Nos. 3032-(70/38) G/S, April 29, 1970, and 3320-(71/34) G/S, April 21, 1971; Vol. II below, pp. 217 and 218.
Special Drawing Account: Manual of Procedures [for] Operations and Transactions in Special Drawing Rights (Washington, 1970); and Supplement No. 1, Principles and Procedures for Reconstitution (Washington, 1971); and Revised Supplement No. 1, Principles and Procedures for Reconstitution (Washington, 1973).