Chapter 12: Two Years of Experience with SDRs (1970–71)
- International Monetary Fund
- Published Date:
- February 1996
When the Requisite Decisions had been taken concerning the currencies that would be convertible in fact, the nature of the first designation plan, the manner of implementing the designation plans, and the acceptance by the Fund of SDRs in its General Account, the way had been cleared for the first allocation of SDRs. The first basic period was to run for the three years 1970–72, with allocations on January 1, 1970, 1971, and 1972.
The amount of the first allocation, which had been planned at SDR 3,500 million, actually turned out to be SDR 3,414.1 million. The Republic of China exercised its option not to receive an allocation, which lowered the rate of allocation somewhat. The rate was equal to 16.8 per cent of participants’ quotas, instead of 17.5 per cent as planned. The amounts of SDRs allocated to individual participants ranged from SDR 867,000,000 for the United States to SDR 504,000 for participants with the smallest quotas.
During 1970 membership in the Fund rose from 115 to 117 and participation in the Special Drawing Account from 105 to 110. The two new members—the Yemen Arab Republic and Barbados—became participants, and three other members—Iraq, Nepal, and Thailand—that had not previously been participants deposited their instruments of participation during the year. Having become participants after the start of the first basic period, these five countries requested that they be included in the next allocation, and the Fund decided that they would receive SDRs beginning with the allocation on January 1, 1971. The second allocation of SDRs was, therefore, to 109 participants, the Republic of China again opting not to receive its share of the allocation. This second allocation, SDR 2,949.3 million, was equal to 10.7 per cent of participants’ quotas.
During 1971 Fiji, Oman, and Western Samoa joined the Fund and became participants in the Special Drawing Account. This raised the Fund’s membership to 120 and participation in the Special Drawing Account to 113. On January 1, 1972 the Fund made a third allocation of SDRs in the amount of SDR 2,951.4 million to 112 participants—to all participants except the Republic of China. The rate of allocation for the third year was computed at 10.6 per cent of the quota as of December 31, 1971 of each participant receiving an allocation.
The amounts received by participants in each allocation are shown in Table 3 at the end of this chapter.
|Central African Republic||1.6||1.4||1.4|
|Congo, People’s Republic of the||1.7||1.4||1.4|
|Germany, Federal Republic of||201.6||171.2||169.6|
|Syrian Arab Republic||6.4||5.4||5.3|
|Trinidad and Tobago||7.4||6.7||6.7|
|Yemen Arab Republic||—||1.1||1.1|
|Yemen, People’s Democratic Republic of||3.7||3.1||3.1|
Names for participating countries are those in effect on December 31, 1971.
Components may not add to totals because of rounding of figures for individual participants.
Names for participating countries are those in effect on December 31, 1971.
Components may not add to totals because of rounding of figures for individual participants.
Another matter that had to be decided—and that also proved easier than had been expected—was how much information concerning transactions in SDRs should be disclosed. The matter involved both information to be revealed within the Fund and information to be made public. As for internal information, each participant would receive confidential monthly reports listing the transactions in SDRs that had taken place plus a statement of its balances. The Executive Directors also wanted to have information on SDR transactions as currently as possible, but they recognized that transactions in reserves were often highly confidential. In particular, it was prudent not to reveal the identities of participants in designated transactions until the transaction had been completed. With regard to the information to be made public, the management and staff proposed that, unlike the situation with respect to use of the Fund’s regular resources, press releases would not be issued on the occasion of transactions in SDRs. But there was a question of what should be published in IFS.
For the first few weeks after the first allocation, the Managing Director gave weekly oral reports to the Executive Board. Then, in February 1970, the staff began to supply confidential written reports, for use only within the Fund, containing data on the total of SDRs used in designated transactions, in repurchases from and payments of charges to the General Account, and in voluntary transactions. It was soon evident that the issue of making SDR transactions public was of no real concern. Many participants were themselves releasing data concerning such transactions.
Hence, the staff suggested that each issue of IFS should include information on SDRs through the end of the preceding month by (1) introducing a comprehensive table in the section on the Fund at the beginning of each issue to report SDR allocations, net use of SDRs, and SDR holdings; (2) adding a table to the international liquidity tables to report SDR holdings as a time series; and (3) adding a line in the country pages for holdings of SDRs. The Executive Directors agreed with these suggestions, and the March 1970 issue of IFS reported countries’ holdings of SDRs for the first time.
Transactions Through the General Account
Repurchases and Payment of Charges
It became evident in the first few months of 1970 that the greatest use of SDRs by participants initially would be for repurchases from and charges payable to the Fund’s General Account. Developing countries especially began to use their SDRs in this way. In the first six months of 1970, 46 participants used a total of SDR 549 million; of this amount, SDR 206 million was used by 22 participants to repurchase their currencies from the General Account, and SDR 56 million was used by 25 participants to pay charges due to the General Account. By April 30, 1971, when SDRs had been in use for 16 months, a total of SDR 1,450 million had been used, of which SDR 641 million had been transferred to the General Account, mainly in repurchases by the United Kingdom and India. From May 1, 1971 to April 30, 1972 (the Fund’s 1971/72 fiscal year), participants transferred a total of SDR 540 million to the General Account, of which SDR 501 million was in repurchases, this figure again heavily influenced by the United Kingdom’s use of its SDRs to repurchase sterling from the Fund.
Two factors contributed to this large transfer of SDRs to the General Account: transfers to the General Account were not subject to the requirement of need, and SDRs transferred to the Fund did not have to be converted into currency but served as a direct means of payment. The majority of participants engaging in these transactions had balance of payments problems, but the reserves of several were rising. Almost all participants holding SDRs at the time that a repurchase became due elected to make some use of them in this way, and many used their SDRs only for the purpose of repurchase from the Fund. For some, the use of SDRs reflected their generally low holdings of reserves: they might have used their SDRs to acquire currency if it had not been possible to use them in repurchases. For others, the relative interest yields on different reserve assets appeared to have influenced their decisions.
Decision Concerning General Account Is Reviewed
The staff’s paper preparatory to the Executive Board’s review of its decision of 1969 concerning the use of SDRs in repurchases and payment of charges was circulated in November 1970. The staff believed that the evidence available so far suggested that the Fund’s decision permitting participants to transfer their SDRs to the General Account had operated in a generally satisfactory manner. That decision had underlined the usability of SDRs as a ready means for settling obligations to the General Account. The absence of limitations on the amount that could be used in this way had not so far had any harmful consequences, either for the SDR facility or for the General Account. The staff therefore recommended that the Fund continue to authorize the use of SDRs, without limitation and at the option of participants, to discharge repurchases outside Article V, Section 7 (b), and to settle all charges payable to the General Account, but also recommended that the decision be reviewed again before the end of 1971, should experience warrant, and in any event before the end of the first basic period, December 31, 1972.
In December 1970 the Executive Board undertook a review of the Fund’s acceptance of SDRs simultaneously with a reconsideration of the principles and procedures of designation (described below). The two subjects were interrelated. Some Executive Directors or Alternates—Mr. Lieftinck and Mr. de Maulde, for example—believed that transactions in SDRs vis-à-vis the Fund’s General Account had hampered the achievement of harmonization of the ratios of SDRs to total reserves held by participants. To achieve greater harmonization, there should be more transactions subject to designation and fewer vis-à-vis the General Account. But other Directors, such as Mr. Schleiminger, hoped that participants’ freedom to engage in voluntary transactions and in transactions with the General Account—that is, in nondesignated transactions—would not be limited; such limitations would jeopardize the acceptability of SDRs as a reserve asset. The Executive Board agreed to continue the earlier decision regarding the receipt of SDRs in the General Account. It would review the decision again before December 31, 1971 or, in any event, before the end of the first basic period.1 This review was delayed until after the end of 1971.
The Fund Uses Its SDR Holdings
The Articles also provided that, in agreement with a participant, the Fund could use the SDRs held in its General Account—that is, could use SDRs in lieu of gold or members’ currencies. In addition, a participant that was obligated to acquire SDRs for certain purposes could obtain them from the General Account. In 1970 and 1971 the SDRs held by the Fund in its General Account were used in each of these ways.
In April 1970 the Executive Board agreed to a staff proposal that the Fund offer to pay participants, at their option, in SDRs the remuneration otherwise payable to members in gold or currency. In September 1970 the Board took a decision allowing the use of SDRs for payment of the net income that it proposed to distribute to members.2 The staff’s paper had shown that there were considerations both in favor of and against the use of the Fund’s holdings of SDRs to pay distributions of net income and therefore recommended that the offer apply only to 1970. But in August 1971, the Executive Board took a decision again permitting the use of SDRs in payment of the distribution of net income voted for the fiscal year ended April 30, 1971.3
At the time of the 1970 decisions, Mr. Stone and some other Executive Directors had expressed concern that, to the extent participants availed themselves of the option to receive SDRs in these transactions with the Fund, the ratios of their holdings of SDRs to their total reserves would be increased and the acceptance liability of those on the designation list would be commensurately reduced. However, for most Directors the persuasive argument in favor of using SDRs for remuneration and the distribution of net income was that further uses for SDRs would promote their acceptability as a reserve asset, especially in this formative period.
Several participants, including Canada, the Federal Republic of Germany, Italy, Japan, the Netherlands, and the United States, elected to receive SDRs in accordance with these two decisions. In 1970, the Fund transferred some SDR 18 million to 15 participants in payment of remuneration on net creditor positions and SDR 9 million to 14 participants in a distribution of net income. In 1971, 7 participants elected to receive a total of about SDR 15 million in payment of remuneration and some SDR 8 million in distribution of net income.
One of the most important uses that the Fund might make of its holdings of SDRs was for the replenishment of its holdings of any currency if it deemed this appropriate for the purpose of the operations and transactions that were conducted through the General Account.4 This use of SDRs supplemented the sale of gold by the Fund and Fund borrowing from its members as a means of currency replenishment. In September 1970 the Fund proposed to replenish its holdings of members’ currencies by sales of gold totaling the equivalent of $325 million. The members involved in these sales were given the option of receiving SDRs rather than gold; 3 of them elected to do so, receiving a total of SDR 68 million. Again, in April 1971, the Fund replenished its holdings of the currencies of 14 members for a total equivalent to $320 million, and 3 members elected to receive a total of SDR 56 million instead of gold.
Hence, during the period January 1, 1970 to April 30, 1971 the Fund transferred, in total, SDR 152 million from the General Account to participants. In the fiscal year 1971/72 the comparable figure was SDR 120 million.
An even more significant development concerning the use of the Fund’s holdings of SDRs took place later in 1971. On August 4, the Executive Board considered a paper drafted by the staff in response to a suggestion by Mr. Palamenghi-Crispi that participants in the Special Drawing Account that were making purchases from the General Account should receive SDRs in lieu of currencies. The staff had not considered the case for using SDRs in drawings from the Fund a very strong one, but thought that it would be useful to try such a use of SDRs in a modest way, so as to gain experience with additional types of SDR transactions. Some Directors favored the idea because this use of SDRs would increase transactions subject to designation and harmonization of participants’ SDR holdings would thus be made easier. Others thought that SDRs would become more palatable politically through greater use. The relevant decision was taken in September.5 However, by the end of 1971 no drawings using SDRs had taken place.
Experience with Designation Plans
Plans for Remainder of 1970
The first quarterly designation plan, as noted in the preceding chapter, had been for SDR 350 million. But the total use of SDRs in transactions subject to designation in the first quarter turned out to be only SDR 133 million, so that no participant was designated for more than 42 per cent of the maximum amount to which it was subject under the plan.
When the staff again proposed an amount of SDR 350 million for the second quarterly designation plan, April–June 1970, Mr. Stone queried the amount at some length. Too large a plan, he stressed, made it necessary for participants to keep their reserves in a more liquid form than might otherwise be required so that they could meet their designation obligations. But what was more important, in his view, was that the designation of amounts in excess of actual use made it difficult for the Fund to work toward equalizing for all participants the ratios of their holdings of SDRs to their aggregate reserve holdings.
The staff defended the amount proposed on the ground that the staff might have to return to the Executive Board for a decision on another plan should one large transaction take place. In the eyes of the users of SDRs the need for a new decision would limit the value of SDRs as a quickly available asset. The Executive Board approved the second designation plan for the larger amount.
As the actual use of SDRs with designation in the second quarter of 1970 was only SDR 114 million, the staff considered that a total of SDR 201 million would be appropriate for the third plan. By the time this plan was formulated, techniques had been worked out so that participants were sending to the Fund much more current data on their holdings of gold and foreign exchange; the third designation plan (for July–September 1970) was consequently based on reserve figures for dates no earlier than the end of April 1970.
Debate on Equalizing Ratios
When it came time to prepare the third quarterly designation plan, the staff, in response to requests from Executive Directors, explored a number of alternative technical formulas for selecting designees. Now that SDRs were in use, several Directors were extremely eager to make sure that designations took place in such a way as to fulfill the principle of equalizing the ratios between participants’ holdings of SDRs and their other reserves, as expressed in the Articles.
Once again an important debate took place on the use and transfer of SDRs, this time with the focus on the procedures for designating participants to receive SDRs.6 As in earlier discussions, the issue at stake was the relative ease or stringency with which the new reserve asset could be transferred between participants. Again, some Executive Directors were concerned that a few industrial countries might eventually have to hold the bulk of the SDRs while other Directors wanted to avoid making the use of SDRs so difficult that they would not become fully accepted as reserves.
The debate about equalizing the relative amounts of SDRs held by participants involved arguments and terminology that were more technical than any of the discussions concerning the establishment and initial use of SDRs. Some background may therefore be helpful.
When the amendments to the Articles were being drafted, there had been considerable debate in the Executive Board about the specific criteria on which to base the selection of designees. It was generally agreed that not only should the balance of payments and reserve position of a participant be taken into account, but so also should the amount of SDRs that a participant already held in its reserves. There had been disagreement, however, as to which ratio between SDRs and reserves should serve as the relevant measure of a participant’s holdings of SDRs—the ratio of holdings of SDRs to official holdings of gold and foreign exchange or the ratio of holdings of SDRs in excess of a participant’s net cumulative allocations to its official holdings of gold and foreign exchange. During the debate these two ratios came to be known as the “holdings ratio” and the “excess holdings ratio.”
In the agreed amendment, the excess holdings ratio was the one accepted, at least for the first basic period, with provision for review of the rules for designation before the end of each basic period. Article XXV, Section 5, thus stated that participants were to be designated in such a way as to promote over time a balanced distribution of holdings of SDRs among them. Schedule F, specifying the rules for designation for the first basic period, stated that participants were to be designated for such amounts as would “promote over time equality in the ratios of the participants’ holdings of special drawing rights in excess of their net cumulative allocations to their official holdings of gold and foreign exchange.”
Inasmuch as Schedule F referred to promoting equality in the ratios “over time,” the issue that was raised early in 1970 when the Executive Board was considering actual designation plans concerned the speed with which that equality ought to be promoted. Since outright equality of the excess holdings ratios seemed to be difficult of attainment, certainly on a continuous basis, the objective of harmonization of the ratios came to be substituted—that is, the ratios of the participants should not diverge too much from each other. Attention centered on the following question: if the ratios of different participants did become diverse, how rapidly should they be brought closer together? This was referred to in the discussions as “catching up.”
The Executive Directors devoted several sessions to the topic of methods of designating participants so as to facilitate harmonization of their holdings of SDRs. The method that harmonized ratios most quickly was referred to as the “filling-up” approach: participants with the lowest ratios would be designated before participants with higher ratios were designated. Variants of the filling-up approach would limit the amounts that participants with the lowest ratios would be designated for, permitting other participants to be designated for larger amounts. Under an alternative method—referred to as a “proportional” approach—the highest ratio existing for any participant would serve as a target in the designation of participants so as to attain harmonization of participants’ ratios.
The staff, believing that whatever rules were agreed could not be uniformly applied and were likely to require modification from time to time, preferred flexible methods for achieving harmonization of participants’ excess holdings ratios. But several Executive Directors wanted the catching-up process to occur as quickly as possible and were, therefore, not receptive to flexible methods. Other Directors considered catching up within a year’s time to be adequate; they wanted the emphasis to be placed on participants’ ability to absorb SDRs rather than on making sure that all participants held relatively the same amounts of SDRs in their reserves.
The solution lay in the use of a relatively large number of designees; this in effect spread out the flow of SDRs and minimized the catching-up problem. Hence, the designation plans for the first two quarters of 1970 included as many as 30 participants each.
By the inception of the designation plan for the fourth quarter of 1970, the catching-up issue was, at least temporarily, subordinate to the concern once again with the total size of the plan. The staff proposed an amount of SDR 200 million. Only SDR 20.7 million of the third plan had been used, however, and Mr. Stone again expressed concern about the consequences for the participants included in the designation list of plans that eventually proved to be excessive. The staff explained the difficulties involved in prognosticating the likely use of SDRs during any calendar quarter and again commented that it was preferable not to have to enlarge a designation plan later: the need for such action might cast some doubt on the immediate usability of the new reserve asset. Other Executive Directors favored a large safety margin in designation plans, believing that the irritation to participants of the drawing up of an additional plan outweighed that of having to make disposition for an amount of SDRs greater than had actually been needed. The Executive Board therefore approved the fourth designation plan for 1970 as drawn up by the staff, of which only SDR 23.3 million was actually used.
In December 1970 the Executive Directors again discussed a staff paper on the principles and procedures of designation for promoting over time equality among participants’ excess holdings ratios. They observed that during the last few months of 1970 little progress had been made in raising excess holdings ratios that were low. They observed further that several problems were emerging that were jeopardizing harmonization of participants’ excess holdings ratios. For example, none of the methods for designation seemed to ensure that participants would not be designated too frequently or for too large amounts in the light of the amount of SDRs that they already held. Therefore, whatever method for designation was used would have to be accompanied by some sort of protective device to ensure that participants’ excess holdings ratios did not diverge too much, or that some participants were not designated excessively. The staff advised against the adoption of any procedure that was too fixed, since the SDR scheme was still in an experimental stage. In addition, once SDRs actually began to be used, it was apparent that the relatively low level of SDR transactions with designation and the marked variation from quarter to quarter in the volume of these transactions added to the difficulties of harmonizing or equalizing excess holdings ratios.
The Executive Directors still did not agree on a practicable formula to equalize or harmonize the relevant ratios. Some Directors pointed to the relatively large amounts of nondesignated transactions—voluntary transactions between participants and the use of SDRs in transactions through the Fund’s General Account—as an important reason for the failure to achieve harmonization, and wondered whether it might not be advisable for the Fund to limit this use of SDRs. Other Directors, however—Mr. Dale, Mr. Palamenghi-Crispi, and Mr. Schleiminger, for example—did not support such limitations on the use of SDRs.
By the end of the fiscal year 1970/71, 28 participants had what were considered excess holdings of SDRs. Three had excess holdings ratios that were regarded as “high.” Belgium and the Netherlands had high excess holdings ratios as a result of bilateral transactions with the United States. Canada’s ratio had become high after it opted to receive SDRs instead of gold when the Fund replenished its holdings of Canadian dollars.
Plans for 1971
In the latter part of December 1970 the staff prepared the first quarterly designation plan for 1971, with special emphasis on the designation of participants with holdings considerably below their cumulative allocations. Designations were to be for a total amount of SDR 250 million. At the time, it appeared that there might be some seasonality in the use of SDRs: more than 45 per cent of the SDR 291 million of transactions with designation that had taken place in 1970 had been in the first quarter of the year. The staff considered it likely that SDR usage might be even higher in the first quarter of 1971 than it had been in the first quarter of 1970.
This designation plan was approved by the Executive Board in January 1971. Some six weeks later SDR transactions involving designation already totaled SDR 172 million and the staff proposed an amended plan for SDR 350 million, which was approved by the Executive Board in February. Transactions with designation for the first quarter of 1971 turned out to be SDR 207 million, much lower than the amount of the amended plan.
The second quarterly plan for 1971 was for SDR 250 million. The method used by the staff to arrive at the designations was the same as had been used since the middle of 1970. Basically, it was assumed that if the plan was fully used—that is, if the use of SDRs was such that the amounts of designation were realized in practice—participants would within a year reach a common excess holdings ratio. In other words, the staff was trying to determine a common ratio that all participants might attain by the end of the year if participants actually used SDRs in the amounts that the staff had estimated at the beginning of the year. The staff arrived at the common ratio by taking the ratio between the estimated annual use of SDRs and the total amount of SDRs that had been allocated. Actually, in the second quarter of 1971 SDR transactions subject to designation amounted to only SDR 10 million. The third and fourth quarterly plans for 1971 were each for SDR 200 million. In the third quarter there were five transactions with designations totaling SDR 69 million.
It was the small amount of SDR transactions requiring designation from March 1971 onward that had led Mr. Palamenghi-Crispi to suggest and the Executive Board to agree (as described above, page 236) that SDRs be used along with currencies when participants in the Special Drawing Account drew on the Fund’s General Account. SDR transactions requiring designation would accordingly be larger since countries receiving SDRs from the Fund would have to acquire currencies through the designation process. Thus the Fund would be more able to influence the rate of harmonization of participants’ excess holdings ratios.
By the time the fourth designation plan for 1971 was considered by the Executive Board, the international monetary situation had suddenly and completely changed. On August 15, 1971, the U.S. authorities had suspended the convertibility into gold of officially held dollars, thus removing what some considered to be the linchpin from the monetary system that had existed since World War II. Among other consequences, the Fund’s General Account could not be operated in the normal way. Hence, the Executive Board was not certain how to proceed with the designation of SDRs for the rest of 1971 nor how participants might react to designation. Mr. Lieftinck thought that participants designated under the proposed plan would probably raise no objections because they would receive SDRs, which had a promising future, in exchange for dollars, which perhaps had a less certain future. But participants using their SDRs and receiving dollars might be reluctant to part with their SDRs. Therefore, it might be preferable to discontinue the use of SDRs for the time being, or at least not adopt a new designation plan. Mr. Kafka disagreed. An announcement by the Fund that the SDR scheme had been paralyzed by the U.S. action on August 15, 1971 would damage the prestige of the scheme. The Fund should go ahead with a designation plan for the fourth quarter of 1971. Other Executive Directors, including Mr. Lindsay B. Brand (Australia), agreed with Mr. Kafka, noting that countries that had elected them had been using SDRs after August 15, 1971. The plan for SDR 200 million was adopted, but only SDR 76 million was used.
Requirement of Need
Late in 1969 and early in 1970, as the Fund was making ready to begin transactions in SDRs, the staff had thought it would be useful to participants if they had some initial guidelines to enable them to decide whether they met the requirement of need expressed in the Articles. Many countries had been informally asking the staff of the various area departments about this point. The staff therefore suggested some general criteria, but when these were discussed by the Executive Board, the Directors expressed their preference for the time being for a pragmatic approach rather than for any rigid formula. Flexible rules regarding the requirement of need would, they believed, help establish the credibility of SDRs.
The staff thereafter formulated two principles to guide participants: (1) participants could use SDRs whenever they had a need to use reserves, and (2) participants could not use SDRs for the sole purpose of changing the amount of SDRs held in their total reserves. Participants were to be encouraged to make their own judgments.
During the first 16 months of operation of the new facility, as participants used their SDRs both through the process of designation and through voluntary bilateral arrangements, all of the transactions were subject to the requirement of balance of payments need. Later examination of these transactions showed that for the overwhelming majority, the use of SDRs had followed a period in which the users’ gross reserves, excluding SDRs, had declined. In some instances, there had been no decline in reserves but the participant’s reserves could be considered to be close to minimum working balances.
In April 1971 the staff reviewed this experience and devised a general statistical test that might provide the necessary information for ex post re-examination of the requirement of need for using SDRs. No Executive Board decision had been taken on such a test by the end of 1971. Meanwhile, the staff’s procedures turned up two instances where the use of SDRs during 1971 appeared not to fulfill the requirement of need. The two participants concerned, Israel and Turkey, subsequently reversed this use of SDRs by acquiring SDRs from the Fund’s General Account.
Total Use of SDRs
From January 1, 1970 to April 30, 1971, the first 16 months that SDRs were in existence, participants used SDRs in three ways: (1) to obtain currency convertible in fact from other participants designated by the Fund; (2) to obtain, in agreement with other participants, equivalent amounts of their own currencies held by those participants; and (3) to make repurchases from and pay charges and assessments to the General Account. The amounts involved were, respectively, SDR 503 million, SDR 306 million, and SDR 641 million, for a total of SDR 1,450 million. There was also a transfer of SDR 152 million from the General Account to participants, largely to replenish the Fund’s holdings of those participants’ currencies.
The second category of transactions involved only two participants, but the relative amounts were larger than those of transactions in the other two categories. The United States used SDR 286 million to obtain dollars, held mainly by Belgium and the Netherlands, and the United Kingdom transferred SDR 20 million to the Federal Republic of Germany. In May and July 1971 the United States used another SDR 305 million to reduce the dollar holdings of Belgium and the Netherlands.
The period after May 1, 1971 was one of considerable disturbance in the international monetary system, but the mechanism of the Special Drawing Account remained fully operative. Since a large number of countries experienced increases in gross reserves, fewer participants had a balance of payments need to use SDRs. Nevertheless, a small number of countries with balance of payments problems used substantial proportions of their SDR holdings to finance their deficits.
Under the Rules and Regulations of the Fund, the gold value of the SDR was translated into values in terms of currencies through the par value of the U.S. dollar and the market rates for other currencies against the U.S. dollar; as a consequence, an expectation of an increase in the official price of gold, following the U.S. announcement of August 15, 1971, created a disincentive for participants to use their SDRs. In the absence of a change in the par value of the U.S. dollar, the amounts of currencies that could be obtained against SDRs continued to reflect the one-to-one relationship between the SDR and the dollar. Participants thus refrained from the use of SDRs.7
An Accepted Reserve
Within less than two years—a remarkably short time—SDRs met and passed several important tests. All but seven of the Fund’s members elected to become participants in the Special Drawing Account. Only one participant, the Republic of China, opted out from the allocations. Over half of the participants used at least some of their allocations, beyond the nominal amounts involved in paying their share of the annual assessments for the costs of operating the scheme. The conversion procedures agreed between the Fund and the issuers of the currencies functioned well. Some participants were both users and receivers of SDRs; a few voluntarily accepted SDRs from other participants in exchange for currency balances. When the Fund gave participants the option of receiving SDRs rather than gold in payment of remuneration on super gold tranche positions and for the replenishment of the Fund’s currency holdings, and when the Fund gave participants the option of receiving SDRs rather than their own currency at the time it distributed net income, a number of participants took SDRs.
Indeed, after the middle of August 1971, when confidence in the U.S. dollar as a reserve currency was shaken, SDRs were thrust into the limelight. At the Twenty-Sixth Annual Meeting, held in Washington from September 27 to October 1, 1971, several Governors suggested that the par values of currencies might begin to be expressed in terms of SDRs. The SDR, rather than gold or the U.S. dollar, could accordingly become the numeraire of the world monetary system, that is, the unit in which international financial transactions were stated.8 Some Governors went even further, suggesting that the SDR could become the main asset in which countries held their reserves or that countries’ accumulated dollar reserves could be converted into a special issue of SDRs. Thus, by the end of 1971 it seemed clear that SDRs not only had been accepted as a new reserve asset but, in all probability, would have a wider role in the future.
The Link Issue Persists
A long-standing and still unanswered question concerned a possible link between the allocation of SDRs and the financing of the economic development of the developing nations. As part of their preparations for the Twenty-Fifth Annual Meeting, held in Copenhagen, September 21–25, 1970, the developing members, meeting as the Group of Seventy-Seven, had examined this issue afresh, and the topic had also been discussed at the Commonwealth Finance Ministers’ meeting in Cyprus in September 1970. At the Annual Meeting in Copenhagen, many Governors for developing countries urged reconsideration of such a link.9 Accordingly, in his concluding remarks Mr. Schweitzer indicated that the Executive Directors would want to give careful consideration to the Fund’s program of work in this field.
The keen interest of developing members in establishing a link between SDR allocations and financing development was exemplified again in October 1970 when a document entitled An International Development Strategy for the Second United Nations Development Decade was adopted by the Second (Economic and Financial) Committee of the General Assembly.10 In paragraph 52 of that document it was resolved that, as soon as adequate experience was available on the working of the SDR scheme, serious consideration should be given to the possibility of establishing a link between the allocation of new assets under that scheme and the provision of additional finance for economic development. But at that UN meeting reservations about such a link were expressed by several delegations, including those from Australia, Belgium, France, Japan, the Netherlands, Sweden, the United Kingdom, and the United States.
Early in 1971 the Fund staff submitted to the Executive Board a paper outlining the main issues that would have to be considered in any study of the desirability and feasibility of creating a link between SDR creation and development finance. And the Economic Counsellor explored informally the ideas of Mr. Manuel Pérez Guerrero, the successor to Mr. Prebisch as Secretary-General of the Unctad.
In April 1971 the Executive Board examined the merits of undertaking a study of a link between the SDR scheme and development finance, and the scope of any such study. To assist the Executive Board in reaching a conclusion as to what might be studied first, the staff suggested two specific studies that might be given priority: (1) a comparison of the main types of link proposals and their implications for aid and for SDR allocations (to be done with the assistance of the World Bank staff), and (2) an analysis of the different link schemes from the point of view of the monetary character of SDRs and the longer-run developments envisaged for the SDR facility. These two proposed studies were approved by the Executive Board in May 1971.
At the 1971 Annual Meeting, although the Governors were very much occupied with the disruption in international finance that had existed since mid-August, several of those for developing members again referred to the link question. Mr. Horowitz, for example, again suggested that part of the SDRs be used to buy World Bank bonds.11
Concern about a link between SDR allocation and the provision of development finance was thus by no means ended as 1971 came to a close.
Additional questions were being considered and discussed within the Fund during 1971 with a view to improving and developing the operation of the SDR mechanism. What effects might the existence of SDRs have on the working of the gold exchange standard?12 How should the yields on the various Fund-related reserve assets—the basic gold tranche, the super gold tranche, readily repayable claims arising out of borrowing by the Fund through the General Arrangements to Borrow, and SDRs—compare, and what considerations should govern the interest paid on these assets? Should they not receive equal interest? Could the Fund influence the asset preferences of countries by interest rate incentives? How should the reconstitution principles be applied? Outside experts as well as the Fund staff were beginning also to consider the new directions in respect of reserves that a reform of the international monetary system might take.13
As the first two years of experience with SDRs came to a close, the Executive Board, assuming that there would be no allocations of SDRs for a while after January 1, 1972, took a decision outlining how reconstitution of the existing amounts of SDRs might take place.14
The SDR mechanism had been successfully launched. Its future was certainly not in question. The continuing deliberations about SDRs now involved ways of developing and expanding the role of the new asset in the international monetary system.
E.B. Decision No. 3188-(70/106) G/S, December 2, 1970; Vol. II below, p. 218.
The payment of remuneration and the distribution of net income are covered in Chap. 19 (pp. 387–92). The decisions permitting the use of SDRs for these purposes, E.B. Decisions Nos. 3033-(70/38), April 29, 1970, and 3130-(70/87), September 11, 1970, are reproduced in Vol. II below, pp. 218–19.
E.B. Decision No. 3383-(71/81) G/S, August 2, 1971; Vol. II below, p. 219.
E.B. Decision No. 3414-(71/98) G/S, September 10, 1971; Vol. II below, p. 219.
For a review of the various transactions and operations in SDRs in the three years 1970–72, see Walter Habermeier, Operations and Transactions in SDRs: The First Basic Period, IMF Pamphlet Series, No. 17 (Washington, 1973).
Statements by the Governors of the Fund for the United Kingdom and Italy and the Governor of the Fund and the World Bank for Japan, Summary Proceedings, 1971, pp. 32–33, 38, and 46.
See, for example, Statements by Mr. Y. B. Chavan (Governor of the Fund and the World Bank for India), Mr. Francisco Morales Bermudez (Governor of the World Bank for Peru), Mr. Mwai Kibaki (Governor of the Fund and the World Bank for Kenya), Mr. David Horowitz (Governor of the World Bank for Israel), Mr. Janko Smole (Governor of the World Bank for Yugoslavia), and Mr. N. M. Perera (Governor of the Fund and the World Bank for Ceylon), Summary Proceedings, 1970, pp. 43, 113, 141–42, 162–63, 164–65, and 177–80.
UN document A/C.2/L.1104/Rev. 1.
Statement by the Governor of the World Bank for Israel, Summary Proceedings, 1971, p. 77. See also Statements by the Governors of the Fund and the World Bank for Ceylon, India, and Korea, ibid., pp. 114, 59, and 17.
These effects were discussed by J. Marcus Fleming, “The SDR: Some Problems and Possibilities,” Staff Papers, Vol. 18 (1971), pp. 25–47, and Fred Hirsch, “SDRs and the Working of the Gold Exchange Standard,” Staff Papers, Vol. 18 (1971), pp. 221–53.
Robert Triffin, “An Agreed International Monetary Standard,” Annals of International Studies, Alumni Association of the Graduate Institute of International Studies (Geneva, 1970), pp. 214–23; and Edward M. Bernstein, “The Dollar is the Problem of the International Monetary System,” Quarterly Review and Investment Survey, Model, Roland & Co., Second Quarter, 1971, pp. 1–12.
E.B. Decision No. 3457-(71/121) G/S, December 3, 1971; Vol. II below, pp. 216–17.