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IMF History (1966-1971) Volume 1
Chapter

Chapter 19: Other Developments in the Fund’s Finances

Author(s):
International Monetary Fund
Published Date:
February 1996
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Fust as there were Important Developments and changes in the Fund’s policies on the use of its resources and with regard to members’ quotas in the years 1966–71, so there were a number of interesting developments in the Fund’s other financial transactions and operations—viz., in borrowing arrangements, in the charges placed on drawings and stand-by arrangements, in repurchases, in investment of assets, in the budget, and in the distribution to members of net income. These developments in the Fund’s other financial operations and transactions are recounted in the present chapter. The sales of gold to replenish currency holdings are discussed in Chapter 20.

General Arrangements to Borrow Renewed

The General Arrangements to Borrow became effective on October 24, 1962 for an initial four-year period and were renewed in 1965 for a four-year period ending on October 23, 1970. The ten participants in the Arrangements1 had consented to the renewal on the understanding that prior to October 24, 1968 the Fund and the participants would initiate and complete a review of the Arrangements. The participants had further agreed that any one of them that wished to withdraw could do so, provided that the notice of withdrawal was given between July 25, 1968 and October 24, 1968. Following the review, the Fund would take a decision not later than October 23, 1969 concerning the renewal.

The process of the Fund’s review of the General Arrangements began in mid-1968. The management and staff believed that it would be preferable for the Fund to rely as much as possible on practice to solve any problems that might arise under the Arrangements and not to suggest formal changes. Although they considered that a broadening of the Arrangements would be desirable—for example, by raising the ceilings for borrowing or by admitting other members of the Fund as participants—they thought it was unlikely that the ten participants would be receptive to such changes.

One change they considered essential, however. The Fund should be assured of recourse to the General Arrangements not only in connection with drawings in the credit tranches by the participants that were also reserve centers, that is, the United States and the United Kingdom, as had been the original purpose of the General Arrangements to Borrow, but also in connection with gold tranche drawings by the reserve centers and drawings by the other participants. The Fund’s holdings of the currencies of the ten participants were down to $745 million. In the opinion of the Managing Director, these low holdings, plus the unsettled situation in world exchange markets, made it appropriate for the Fund to be able to use the General Arrangements in connection with any drawing by any of the ten participants. In fact, Mr. Schweitzer considered such a broadening of the Arrangements necessary to maintain the reserve character of members’ gold tranche positions in the Fund, which were then in the process of being made automatically available to members. He feared that otherwise the Fund might find itself short of currencies needed to implement gold tranche purchases.

The existing procedure gave the Deputies of the Group of Ten time to meet in advance of an activation of the General Arrangements to Borrow. This procedure was adequate for requests to the Fund for drawings or stand-by arrangements in the credit tranches. But when the Fund had to deal with a request for a drawing in the gold tranche, there was not time for an advance meeting by the Deputies. In the instance of gold tranche drawings, the Fund itself had no prior discussions with members.

Mr. Schweitzer therefore informed the Executive Directors that he had cabled the chairman of the Deputies of the Group of Ten, Mr. Ossola, to suggest that the Deputies look into a possible adjustment of the existing procedure. The Fund staff suggested two alternatives: (1) an accelerated procedure by which consultations for activation could go through the Executive Directors (rather than the Deputies of the Group of Ten), or (2) a prefinancing of a gold tranche drawing from the Fund’s general resources with a subsequent activation of the General Arrangements to Borrow to replenish the Fund’s holdings of the currencies drawn.

The Deputies agreed that the Arrangements could be used for drawings, including gold tranche drawings, by all participants. They were opposed, however, to an accelerated procedure for gold tranche drawings—alternative (1) above—preferring to keep the procedures of the Fund and those of the Deputies separate. They accepted instead the prefinancing procedure—alternative (2) above: in effect, any gold tranche drawing prefinanced by the Fund would be refinanced from the General Arrangements to Borrow. Otherwise, the Deputies proposed to their Ministers and Governors that there be no amendments or modifications of the General Arrangements as they had stood since 1962, and Mr. Schweitzer was informed to this effect.

Shortly thereafter, on October 21, 1968, the Executive Board took a decision noting the completion of the required review and concluding that no amendments or modifications of the Arrangements were needed. The Fund’s review of the General Arrangements by October 24, 1968 was thus complete.

About one year later, during the 1969 Annual Meeting, the Ministers and Governors of the Group of Ten agreed to renew the Arrangements without modification for a period of five years. Each participant was to have the right, during the six months beginning October 24, 1969, to inform the Fund of its intention to withdraw from the Arrangements as renewed, but it was not expected that any participant would do so. On October 17, 1969, although a few Executive Directors elected by developing members were less than enthusiastic, the Executive Board took a decision renewing the General Arrangements for five years from October 24, 1970.2 As no participant in the Arrangements had notified the Fund at the end of six months (April 1970) that it intended to withdraw, the period of effectiveness of the Arrangements was thus extended until October 24, 1975 with the continued adherence of all participants.

Since commitments to the Arrangements were expressed in national currency, the commitment of the participants to lend to the Fund gradually became somewhat lower than the original total of $6 billion. With the devaluation of sterling in November 1967, the U.K. commitment fell from $1,000 million to $857 million, and with the devaluation of the franc in August 1969, the French commitment fell from $550 million to $489 million. Although the commitment of the Deutsche Bundesbank rose from $1,000 million to $1,093 million with the revaluation of the deutsche mark in October 1969, the net effect of these changes was to reduce the total commitment of the ten participants from $6,000 million to $5,889 million.

The association of Switzerland with the General Arrangements to Borrow was worked out for the second time in 1967. At that time, the Managing Director discussed with the Swiss authorities the extension of the association of Switzerland, and the Swiss authorities informed him that they were prepared to extend the period of the agreement between Switzerland and the Fund until October 23, 1970, the date on which the first renewal of the Arrangements was to expire. As with the original agreement, the Swiss authorities indicated that they wished the extension to be effected through an exchange of letters between the Ambassador of Switzerland to the United States and the Managing Director of the Fund. After the Executive Board agreed on November 17, 1967, there was an exchange of letters.3

After the second renewal of the General Arrangements to Borrow, a similar exchange of letters took place extending the period of the agreement between Switzerland and the Fund until April 30, 1974, which was the date of expiration of the Swiss federal decree authorizing the association of Switzerland with the Arrangements.4

Some Changes Postponed

During the discussions leading to the amendment of the Articles of Agreement in 1969, several Executive Directors expressed the view that it might be appropriate to effect certain changes in the General Arrangements to Borrow in order to harmonize them with the amended Articles. On the occasion of the second renewal of the Arrangements, the management and staff once more gave some thought to the desirability of introducing such changes. However, they again considered it preferable to wait a bit longer.

In October 1970, one year after the second renewal of the General Arrangements had been agreed, the Executive Directors considered possible changes in them. Two changes—one with respect to a transfer charge and one with respect to the rate of interest—would lower the return on claims under the Arrangements to the level of the remuneration that the Fund, under the amended Articles, paid on super gold tranche positions in the Fund and of the interest paid on holdings of SDRs. A transfer charge of ½ of 1 per cent, together with the interest rate of 1½ per cent per annum, meant that the Fund’s payment on claims under the Arrangements exceeded the 1½ per cent per annum remuneration paid on super gold tranche positions and the 1½ per cent per annum paid on holdings of SDRs. A third change would clarify that the meaning of the phrase currency convertible in fact as used in the decision on the General Arrangements to Borrow had not been modified by the amendment of the Articles; and a fourth would enable the Fund to use SDRs to pay interest on claims under the General Arrangements and to repay the claims.

Although the majority of the Executive Directors regarded the changes as probably desirable, they saw no need for urgency. In particular, they considered it better not to reopen discussion about the possible elimination of the transfer charge on claims under the Arrangements.

Later on, in March 1971, the Executive Directors considered at length the characteristics of various Fund-related assets, with special reference to the yield received on each by holders of these assets. The staff argued for harmonizing the treatment of the yields on SDRs, super gold tranche positions, and claims under the General Arrangements to Borrow. Most Executive Directors, however, saw considerable differences in the various Fund-related assets and, therefore, thought that some differentiation was necessary.

None of these proposed changes in the General Arrangements to Borrow was made.

Activation of General Arrangements to Borrow

After the first two activations of the General Arrangements to Borrow in December 1964 and May 1965 in connection with drawings by the United Kingdom, the Fund made no further calls on the Arrangements until June 1968. Then, to help finance purchases by France and the United Kingdom, $741 million was borrowed from Belgium, the Deutsche Bundesbank, Italy, the Netherlands, and the Sveriges Riksbank (Table 9). The Fund had planned to borrow from France also when it approved the U.K. stand-by arrangement in November 1967, but by June 1968 France’s balance of payments position was such that it could not extend credit and was itself drawing from the Fund.

Table 9.Borrowing by Fund Under General Arrangements to Borrow, 1966–71(In millions of U.S. dollars)
ParticipantJune

1968
June

1969
Sept.

1969
Feb.

1970
Belgium70.0
Canada40.025.524.5
France
Deutsche Bundesbank366.090.094.0
Italy185.020.030.529.5
Japan40.033.032.0
Netherlands75.010.07.57.5
Sveriges Riksbank45.0
United Kingdom
United States
Totals741.0200.0190.593.5

When France drew from the Fund in June 1968, its claim on the Fund under the General Arrangements, equivalent to $140 million, was transferred to Belgium, the Deutsche Bundesbank, Italy, and the Netherlands. This transfer conformed to a position taken by the Managing Director in October 1966 that a member drawing from the Fund that had a claim on the Fund under the General Arrangements should liquidate its claim on a more or less pari passu basis. The rationale was that the Fund should not remain indebted under the General Arrangements any longer than it had to, and the Fund should not continue to pay interest on a claim under the Arrangements if it had ample balances of the lender’s currency which it could use without the payment of interest.

The General Arrangements to Borrow were activated twice in 1969, once in June for a purchase by the United Kingdom, when $200 million was borrowed from Canada, the Deutsche Bundesbank, Italy, Japan, and the Netherlands, and again in September, when $190.5 million was borrowed from these same participants for a drawing by France. In February 1970, in connection with a further purchase by France, the Fund borrowed from Canada, Italy, Japan, and the Netherlands. The share for the Deutsche Bundesbank that had been arranged in September 1969, when the stand-by arrangement with France was approved, was omitted from this second borrowing because of the subsequent weakening of the Federal Republic of Germany’s balance of payments position.

No further borrowings under the Arrangements took place through the end of 1971. The total borrowed under the General Arrangements to Borrow from 1966 to 1971 was thus $1,225 million.

The drawings involving activation of the General Arrangements to Borrow were financed only in part by the amounts that the Fund borrowed under the Arrangements. Larger amounts came from the Fund’s own holdings of currencies. In addition, beginning with the first activations of the General Arrangements to Borrow in 1964 and 1965, it was the Fund’s practice on the occasion of each drawing that involved replenishment of the Fund’s own currency holdings through the Arrangements also to replenish its currency holdings by sales of gold. No generalized policy had been established providing a link between activation of the General Arrangements and the Fund’s sales of gold for currency replenishment. Instead, the proportions of the currencies to come from the Fund’s own currency holdings, from borrowings under the General Arrangements, and from the sales of gold were decided for each drawing necessitating activation of the General Arrangements.

Table 10 lists the five large drawings between 1966 and 1971 which entailed activation of the General Arrangements to Borrow, and indicates how the total drawings were financed.

Table 10.Financing of Drawings by France and United Kingdom Involving Activation of General Arrangements to Borrow, 1966–71(In millions of U.S. dollars)
Financed by
DatePurchasing

Member
Amount

Purchased
Currency

holdings
General

Arrangements

to Borrow
Gold

sales
June 1968France745298265182
June 1968United Kingdom1,400559476365
June 1969United Kingdom50025020050
September 1969France500208190.5101.5
February 1970France48529393.598.5

The Fund’s first repayments under the General Arrangements to Borrow took place in May 1967. In that month, when the United Kingdom repurchased sterling, the Fund repaid to eight participants the $405 million that it had borrowed in December 1964. From then on the Fund made frequent repayments. Some were made ahead of time, usually when the member was encountering payments difficulties and was drawing from the Fund. In February 1968, for instance, Canada requested a repayment of $35 million. In July 1969, Belgium, when requesting a gold tranche purchase of $46.5 million, asked for repayment of its claim of $70 million. In December 1969, the Deutsche Bundesbank asked for repayment of $340 million and also requested the Fund to transfer the balance of its claim, $210 million, to other participants. The Fund consented and the transfer was made to Canada, Italy, Japan, and the Netherlands. In July 1970, Italy asked the Fund to repay its claims, $330 million, and the Executive Board agreed.

By August 1971 all indebtedness under the General Arrangements to Borrow had been repaid. The attractive gold-colored promissory notes that the Fund had issued to the fiscal agents of the participants in the Arrangements were canceled.

Bilateral Borrowing

On only one occasion did the Fund engage in bilateral borrowing. In August 1966, when the United States sought to draw $250 million in Italian lire, the Fund’s holdings of lire were down to $74 million. The Fund thereupon borrowed the $250 million in lire from Italy under a special arrangement similar to, but outside of, the General Arrangements to Borrow.5

In June 1970, when the loan still had a year to run, the Italian authorities, wishing to augment their liquid reserves by acquiring yen from Japan, asked the Fund to transfer its claim to Japan. The Fund agreed, and the transfer was made in two installments of $125 million each, on June 26 and July 10, 1970. Approximately a year later—in April and August 1971—the Fund ended this indebtedness on schedule by repaying Japan, also in two installments, each for $125 million. The repayment was facilitated by the rise in the Fund’s holdings of yen as a result of repurchases in that currency by other members and as a result of the increase in Japan’s quota late in 1970. This repayment and the final repayments under the General Arrangements to Borrow freed the Fund in August 1971 of all indebtedness for the first time since December 1964.

Although the Fund did not undertake any other bilateral borrowing, thought was given to the possibility. Early in 1968, as crises in foreign exchange markets were becoming more frequent, as the magnitudes involved in international financial transactions were becoming larger, and as drawings from the Fund were expected to be helpful in financing the unusually large flows of capital, the Fund began to look around for additional financial resources. It was thought that still larger drawings could be expected after gold tranche purchases became automatic and after the buffer stock financing facility went into effect. The management and staff, eager to ensure that the Fund’s resources would be adequate to meet these potential demands, explored the possibility of instituting some type of standing arrangements by which the Fund might borrow bilaterally from its members.

Such arrangements as were conceived were to be broader than the General Arrangements to Borrow. The Fund would be able to borrow from any member willing to lend if, for whatever reason, it needed to replenish its holdings of that member’s currency. Drawings could give rise to a scarcity in the Fund’s holdings of particular currencies. Or the Fund might need certain currencies to help finance gold tranche purchases, or to repay an indebtedness to another member from whom the Fund had borrowed. Bilateral borrowing would not be a substitute for increases in quotas. Nor would it be used where resources were available in adequate amounts under the General Arrangements to Borrow. The purpose of bilateral borrowing would be to alleviate temporary shortages in the Fund’s liquidity.

At the 1968 Annual Meeting, the Managing Director told the Governors that the time had come to explore the possibilities of general bilateral borrowing arrangements.6 But the reaction of the Governors of the six eec countries was negative. They preferred to augment the Fund’s resources by a general increase in quotas, by selective increases in their own quotas, and perhaps by a rise in the ceilings under the General Arrangements to Borrow. Similarly, in March 1969 when the Executive Directors discussed their future workload, they gave a much higher priority to other ways of enhancing the Fund’s liquidity—the activation of the SDR facility, the fifth general review of quotas, and renewal of the General Arrangements to Borrow—than to the possibility of wider borrowing arrangements.

Because these other prospective ways of expanding the Fund’s liquidity had not yet been acted upon, and it appeared that action might not be taken for some time, the management and staff continued to examine all feasible methods of adding to the Fund’s liquidity. At their request, an Executive Board discussion of bilateral borrowing was held in May 1969. In general the Executive Directors had no objection in principle to borrowing bilaterally should circumstances justify it, but most of them considered it premature to take any decision on the matter.

At the 1969 Annual Meeting the Governors agreed to activate the SDR facility and to renew the General Arrangements to Borrow, and by February 1970 agreement had been reached on quota increases in connection with the fifth general review of quotas. Consequently, the matter of standing arrangements for bilateral borrowing by the Fund was dropped.

Review of Charges

In the early months of 1966, when the Executive Directors were re-examining many facets of the Fund’s policy regarding the use of its resources, it seemed a propitious time to undertake as well a review of the Fund’s schedule of charges. The existing schedule had been in effect since May 1, 1963 and had had no more than minor modifications since 1954.

In the paper prepared for the Executive Board’s deliberation, the staff did not propose an increase in the level of charges. The staff’s analysis was that, despite the continuous inflation and the rise in worldwide interest rates, the prevailing level of the Fund’s charges was probably not too low. Charges were meant to be low enough to encourage members in need to make use of the Fund’s resources, although not so low as to discourage repurchases. Moreover, inasmuch as the Fund had been running a substantial surplus since the late 1950s, there was no reason to raise charges to enhance the Fund’s revenues. Also, there was logic in keeping the Fund’s charges below commercial interest rates. A purchase from the Fund involved a repurchase commitment expressed in terms of gold or its equivalent; borrowing in private capital markets did not. It had already been recognized that loans to the Fund by members could justifiably carry an interest rate lower than comparable market rates because of the gold value of the member’s claim against the Fund; the same consideration would presumably be valid for members’ obligations to repurchase from the Fund.

The staff did recommend, however, that the progression of charges by the tranches in which the Fund held a member’s currency be eliminated; instead, there should be a single schedule of charges for all holdings of a member’s currency, based only on the time that drawings were outstanding. The progression of charges by tranche position was thought to be much less necessary than when it had last been seriously considered, some 13 years earlier. Since that time, the Fund had instituted a number of other policies that restrained members from drawing excessively. The elimination of this progression would simplify the schedule of charges.

When this subject was discussed in the Board, nearly all the Executive Directors favored retention of the existing schedule, although the discussion revealed the same duality of views as had prevailed in the past—some believing, while others did not, that the Fund’s charges could well be set closer to market rates of interest. Mr. Ulrich Beelitz (Federal Republic of Germany), Mr. Eklöf (Sweden), and Mr. Siglienti (Italy), among others, put forward new reasons why the level of charges, especially in the upper credit tranches, should be raised. The Fund should consider as part of its necessary costs the payment of interest or the distribution of a portion of its net income to those members having gold tranche and super gold tranche positions in the Fund. On the other hand, those speaking for developing members—Mr. Arun K. Ghosh (India, Alternate to Mr. Anjaria), Mr. Mansour, and Mr. Nikoi—reiterated the view that, because of the nature of the Fund and of its objective to help members, the interest rates in private capital markets had no relevance to the charges levied by the Fund.

Most of the Executive Directors were not in favor of the staff’s suggestion to abolish the progression of charges by tranches. Mr. Dale regarded progression as a sort of symbolic reward to members that kept their drawings small. Mr. Lieftinck thought that there was still some efficacy in the Board’s belief in the incentive and disincentive effects that had been initially responsible for differentiating charges by tranche position.

Accordingly, in April 1966 the Executive Board approved retaining without time limit the existing schedule of charges. The Board provided, however, for a review of the schedule prior to May 1, 1967, when the next fiscal year would begin, and annually thereafter.

The first annual review of the schedule of charges under this decision was carried out in April 1967 using the lapse of time procedure—that is, without a formal meeting or discussion. Once more the Executive Board decided to keep the existing schedule in effect. Similar reviews took place in April 1968, in April 1969, in April 1970, and in April 1971.

Table 11 gives the schedule of charges that thus prevailed. There was also a service charge of ½ of 1 per cent on the amount of the transaction, except for gold tranche purchases, and this charge applied whether or not the purchases were made under a stand-by arrangement. In the instance of a stand-by arrangement, the member paid a commitment charge of ¼ of 1 per cent per annum on the amount that could be purchased under the stand-by arrangement. If the stand-by arrangement was drawn on, the commitment charge was credited against the service charge. There were precise rules for calculating the holdings of a member’s currency and the resulting charges; these rules were somewhat liberalized in 1968.7 Because of the crediting of commitment charges against service charges, a stand-by arrangement involved no cost for the member to the extent that purchases were made under it. If the stand-by arrangement was used in full, it became, retroactively, a free facility.8

Table 11.Charges on Fund’s Holdings of Member’s Currency in Excess of Member’s Quota Resulting from Transactions Effected from May 1, 1963 to December 31, 1971
Holdings Equivalent to Following Percentages of Quota
More than100150200
But not more than150200
Charges in Per Cent Per Annum1
Service charge20.50.50.5
Duration:
0–3 months0.00.00.0
3–62.02.02.0
6–122.02.02.5
1–1½ years2.02.53.0
1½–22.53.03.5
2–2½3.03.54.03
2½–33.54.034.5
3½–44.034.55.0
4–4½4.55.0
4–4½5.0
Average Effective Rates in Per Cent Per Annum4
Duration:
3 months2.002.002.00
62.002.002.00
1 year2.002.002.25
1½ years2.002.172.50
22.122.382.75
2.302.603.00
32.502.833.25
2.713.073.50
42.943.31
3.17

Except for the service charge, which was payable once per transaction and was expressed as a percentage of the amount of the transaction.

No service charge was payable in respect of any gold tranche purchase effected after July 27, 1969.

Point at which consultation between the Fund and the member became obligatory.

Total charges payable by the member over the stated period, expressed as a percentage and divided by the number of years of the period. Includes service charge.

Except for the service charge, which was payable once per transaction and was expressed as a percentage of the amount of the transaction.

No service charge was payable in respect of any gold tranche purchase effected after July 27, 1969.

Point at which consultation between the Fund and the member became obligatory.

Total charges payable by the member over the stated period, expressed as a percentage and divided by the number of years of the period. Includes service charge.

The reader is also reminded of two other developments regarding the payment of charges mentioned in earlier chapters. In September 1969 the Executive Board decided that no service charge would be payable for gold tranche purchases made after July 27, 1969, and in December 1969 the Executive Board gave members the option of using SDRs to settle charges payable to the General Account. The Board further agreed a few months later that participants obtaining SDRs from the General Account in order to pay charges or assessments did not necessarily have to use gold to obtain those SDRs; if they wished, they could use any currency acceptable to the Fund in repurchases, provided that the participant had consulted the Managing Director on the currencies and the amounts of each to be used to acquire the SDRs.9

Another development in the fiscal year 1969/70 also affected the payment of charges. As has been noted in Chapter 13, when the amendments to the Articles affecting the Fund’s rules and practices went into effect on July 28, 1969 a change was made in the method of calculating a member’s monetary reserves: currency liabilities were no longer to be deducted from gross reserves. The Articles provided that, if a member’s monetary reserves were less than one half of its quota, it might pay some of the charges due to the Fund in its own currency rather than in gold; this change in the method of calculating monetary reserves had repercussions on the media for payment of charges (as well as on the media for repurchase transactions discussed below). Without the deduction of currency liabilities, the size of some members’ monetary reserves as officially computed by the Fund became larger, and members that heretofore had paid all of their charges in national currencies, because their currency liabilities exceeded their gold and foreign exchange holdings, were required to pay part or all of their charges in gold.

Repurchases

Three important developments in the Fund’s policies regarding repurchases during the years 1966–71 have already been discussed—the use of SDRs for repurchases; the recommendations by the Fund to members in connection with repurchases of drawings made under the compensatory financing facility; and the amendments to the Articles of Agreement involving repurchase obligations.10 But during these years there were also other changes in the policies regarding repurchases. The most important of these changes was contained in a decision of the Executive Board taken in May 1970, a decision to implement the new provisions of the Articles of Agreement regarding repurchases. Basically, the decision enabled members to fulfill their repurchase obligations by substituting currencies for the currencies that the Fund could not accept or could accept only in limited amounts because of the limitation imposed by the Articles on the Fund’s holdings of any currency above 75 per cent of the quota of the member concerned.11

A related decision speeding up the reporting of monetary reserves data was taken in April 1971. The Executive Board decided to change the previously existing system under which (1) each member whose currency was held by the Fund on any April 30 was required to report provisional monetary reserves data to the Fund not later than the following May 31 and (2) all members had to provide final monetary reserves data by October 31. Rule I-6 of the Fund’s Rules and Regulations was amended to provide that not later than June 30 of each year all members must furnish to the Fund the data necessary for the calculation of their monetary reserves as of the previous April 30. The requirement of reporting monetary reserves data on a provisional basis that had been introduced in 1963 was abolished.12

Another problem about repurchases concerned small amounts of repurchase obligations, that is, $500 or less. Since the expense involved in collecting such small amounts often exceeded the amount of the repurchase obligation itself, the Executive Board had decided in 1957 that repurchase obligations of less than $500 should be collected on the next occasion thereafter that a repurchase obligation occurred which, together with the earlier one, would total $500 or more.13 In the interest of economy of administrative effort and of simplification for both members and the Fund, the staff proposed in 1968 that, if a provisional or final repurchase obligation included an amount of gold or currency equivalent to $500 or less, that amount should be abated. Moreover, should repurchases calculated on the basis of final data for monetary reserves differ from those calculated earlier on the basis of provisional data, the Fund would not refund or collect the difference if the amount involved was $500 or less. This proposal would eliminate repurchase obligations for all members whose currencies were held by the Fund on April 30 at a level of $500 or less above 75 per cent of quota; those members also would not need to make a provisional report on their monetary reserves, as still required at that time. The proposal would also eliminate from currency budgets for repurchases the use of those currencies that were held by the Fund on April 30 at a level of $500 or less below the 75 per cent of a member’s quota. The amounts of currency that would not be repurchased would enter into the calculations of subsequent obligations or could be repurchased as part of a voluntary repurchase exceeding $500 made subsequently. The Executive Board agreed to the staff proposal with little discussion.14

When in April 1971 the Executive Board agreed to the speeding up of the reporting of monetary reserves data, it was also agreed to round calculations of repurchase obligations to the nearest $1,000. Hence, the 1968 decision on amounts of $500 or less was abrogated.

The Executive Board took two further decisions in 1971 regarding repurchases. These governed the use in repurchase of a currency for which the exchange rates were not maintained on the basis of the member’s par value. The Executive Directors elaborated a decision taken in 1954 that governed the use in repurchase of a fluctuating currency.15

Total Repurchases

Beginning in 1968 repurchases became very large. For the six years 1966–71 they aggregated $6.7 billion. The United Kingdom repurchased $2.8 billion, India $640 million, and Brazil, Chile, Colombia, France, and the United States $200 million each. In 1968 alone repurchases totaled $1.1 billion, and they were $1.5 billion or $1.6 billion in each of the years 1969, 1970, and 1971. In the fiscal year ended April 30, 1971, repurchases exceeded purchases. In the next fiscal year repurchases were by far the largest of any fiscal year since the beginning of the Fund’s operations. There also began to be substantial advance repurchases, because members had ample reserves and wished to reduce their indebtedness to the Fund, lest the price of monetary gold be raised.

The total amounts repurchased compared with total purchases for each of the Fund’s fiscal years 1965/66–1970/71 are shown in Table 12. The amounts repurchased by each member are given in Table 13 at the end of the chapter.

Table 12.Total Purchases and Repurchases by Members, Fiscal Years Ended April 30, 1966–71(In millions of U.S. dollars)
Purchases1Repurchases2
19662,817.29406.00
19671,061.28340.12
19681,348.251,115.51
19692,838.851,542.33
19702,995.651,670.69
19711,167.411,656.86
Total12,228.736,731.51

Includes purchases that raised the Fund’s holdings of the drawing members’ currencies to no more than 75 per cent of quota. These purchases are not subject to repurchase.

Includes repurchases that reduced the Fund’s holdings of members’ currencies below the amounts originally paid on subscription account and repurchases of members’ currencies paid in settlement of charges. Excludes sales of currencies of members held by the Fund in excess of 75 per cent of quota, as a result of previous purchases, and adjustments due primarily to settlement of accounts with countries that have withdrawn from the Fund; these sales and adjustments have the effect of repurchases.

Includes purchases that raised the Fund’s holdings of the drawing members’ currencies to no more than 75 per cent of quota. These purchases are not subject to repurchase.

Includes repurchases that reduced the Fund’s holdings of members’ currencies below the amounts originally paid on subscription account and repurchases of members’ currencies paid in settlement of charges. Excludes sales of currencies of members held by the Fund in excess of 75 per cent of quota, as a result of previous purchases, and adjustments due primarily to settlement of accounts with countries that have withdrawn from the Fund; these sales and adjustments have the effect of repurchases.

Table 13.Repurchases of Currencies, Fiscal Years Ended April 30, 1966–711(In millions of U.S. dollars)
Member196619671968196919701971Total2
Afghanistan1.14.44.32.710.23.326.0
Argentina52.064.034.07.6157.6
Belgium32.932.9
Bolivia2.52.58.01.014.0
Brazil59.027.07.080.075.2248.2
Burundi2.03.25.22.20.22.215.0
Canada64.864.8
Ceylon11.27.510.020.627.276.5
Chile41.538.526.028.055.031.2220.2
Colombia28.034.035.023.261.335.6217.1
Costa Rica2.52.52.89.88.83.029.4
Cyprus1.21.20.20.40.83.8
Denmark25.625.6
Dominican Republic4.57.510.52.525.0
Ecuador2.00.23.28.25.36.325.2
Egypt34.516.053.224.020.07.5155.2
El Salvador5.015.07.327.3
Finland89.789.7
France246.3246.3
Ghana5.64.04.60.818.529.062.5
Guatemala0.40.47.25.68.422.0
Guinea0.50.51.0
Haiti2.83.11.62.02.43.215.1
Honduras2.55.22.22.512.4
Iceland15.015.0
India75.057.557.5128.0187.0135.0640.0
Indonesia16.327.413.457.1
Iran3.514.015.332.8
Iraq40.040.0
Ireland1.38.710.0
Jamaica330.10.1
Jordan330.30.3
Kenya0.93.03.9
Korea10.71.812.5
Lesotho0.50.5
Liberia5.03.24.44.64.121.3
Malaysia333
Mali3.05.03.03.014.0
Mauritius4.04.0
Morocco5.94.82.414.227.3
Nepal1.5331.5
New Zealand35.064.320.639.2159.1
Nicaragua35.65.616.312.039.5
Nigeria3.13.1
Pakistan1.91.915.932.410.963.0
Panama0.10.83.21.45.5
Paraguay0.40.4
Peru42.411.121.374.8
Philippines10.510.85.526.8
Rwanda3.03.01.07.0
Sierra Leone3.53.46.9
Somalia38.78.31.918.9
South Africa50.050.0
Spain3.748.752.4
Sudan2.53.18.66.85.69.135.7
Swaziland1.01.0
Syrian Arab Republic7.33.26.412.42.52.434.2
Tanzania0.10.20.10.4
Trinidad and Tobago1.03.84.8
Tunisia0.20.511.86.65.812.937.8
Turkey21.518.019.1—3.1424.524.0104.0
Uganda0.40.4
United Kingdom654.8507.5934.2684.82,781.3
United States284.2284.2
Uruguay2.08.05.014.533.362.8
Yugoslavia30.011.511.524.047.842.8167.6
Zaïre8.138.1
Zambia3.00.23.42.69.2
Total2406.0340.11,115.51,542.31,670.71,656.96,731.5

A dot (•) indicates that the country was not a member at the time; a dash (—) indicates that no repurchases were made.

Components may not add to totals because of rounding of figures for individual members.

Less than $50,000.

Reversal of part of the amount repurchased in 1967/68, which was included among repurchase data for that year.

A dot (•) indicates that the country was not a member at the time; a dash (—) indicates that no repurchases were made.

Components may not add to totals because of rounding of figures for individual members.

Less than $50,000.

Reversal of part of the amount repurchased in 1967/68, which was included among repurchase data for that year.

Investment of the Fund’s Assets

As it had since 1956, the Fund continued until early in 1972 to hold short-term securities of the U.S. Treasury as an investment of some of its gold. In earlier years the income from these investments had been used to meet the Fund’s administrative deficits, but in the absence of such deficits for several years it had been credited to a Special Reserve as a contingency against possible future deficits.

Until September 1970 the amount so invested remained at $800 million, as authorized by the Executive Board in November 1960 when, at the request of the U.S. authorities, they had raised the amount from $500 million. Beginning early in 1968, however, there were several developments that culminated first in a reduction in the amount of these investments and later, in February 1972, in their termination.

On several occasions when the Executive Board was considering the administrative budget, Mr. Plescoff, Mr. Lieftinck, and others had indicated that the Fund’s reserves were reaching a magnitude such that their growth could be slowed. They preferred to see a distribution of some net income rather than continual additions to reserves. Then, in mid-1968, when speculation was rampant that an increase in the official price for gold was imminent, some Executive Directors voiced concern for the safety of the investments themselves. Mr. Lieftinck and Mr. Plescoff inquired closely of the Managing Director about what was being done by the Fund to safeguard the value of these investments of gold.

The Managing Director and some of the senior staff got in touch with the U.S. authorities to ascertain whether the Fund might obtain some kind of gold guarantee or an “instant recall” of its invested gold. The latter would involve an exchange of letters indicating that, in the event of a new par value for the dollar (tantamount to a change in the price of gold), the U.S. authorities would exchange the securities held by the Fund for gold, at the predevaluation price.

When a new U.S. Administration, under President Richard M. Nixon, took office in January 1969, the Managing Director again inquired of the U.S. authorities what action might be taken to help the Fund protect its investments of gold. Mr. Schweitzer explained that the initial reasons for the investments were no longer relevant since the Fund had not had a budgetary deficit for several years. Moreover, the Special Reserve, derived solely from the income from these investments, had grown to $262.9 million at the end of the Fund’s last fiscal year, April 30, 1968. The Managing Director pointed out that it was becoming increasingly difficult for him to justify these investments, although he recognized that, since these amounts had been incorporated in the figures for gross U.S. gold reserves, disinvestment now entailed a reduction in the gold reserves of the United States. A decline in U.S. gold reserves, even of such a technical nature, could have adverse effects on the international monetary situation.

Steps Toward Disinvestment

In April 1969, when the administrative budget for the fiscal year 1969/70 was being considered in the Board, the Managing Director promised a review of the Fund’s investment program and of the situation regarding the Fund’s reserves. The staff had already begun to examine the considerations involved in terminating the investments, and by August 1969 the management had decided that the case for first cutting back and finally eliminating the investments of gold in U.S. securities was overwhelming. All that was needed was to find a proper way to do so.

In September 1969, in the course of the Board’s review of the Fund’s reserves, most attention centered on the investments of gold. The Executive Directors, while recognizing that it was difficult to judge the adequacy of the Fund’s General and Special Reserves, were inclined to think that these reserves were not excessive. But they noted that, under the amended Articles, the Fund could make transfers from the Special Reserve to the General Reserve, and that amounts transferred could be used for operational or administrative deficits. The deficits could include those resulting from the payment of remuneration on members’ creditor positions, as required by the amended Articles. However, amounts transferred from the Special Reserve would not be available for distribution of net income to members. The possibility of transfers from the Special Reserve to the General Reserve to cover deficits would probably guarantee, at least for many years, sufficient reserves to cover any operational losses the Fund might incur. Hence, the reasons for creating the Special Reserve had disappeared. Mr. Plescoff, calling the Board’s attention to the fact that the Executive Director for France had voted against the investments in the first place, in 1956,16 regretted that the Fund was not now free to liquidate these investments. Although Mr. Plescoff did not like such a decision, the Executive Board agreed to having annual, rather than quarterly, reviews of the Fund’s investment program. It was expected that these annual reviews would be more substantive than the more or less pro forma reviews that had been conducted quarterly in the past.17

Following further discussions in September 1970 between the Managing Director and the U.S. authorities, covering not only the Fund’s investment in U.S. Government securities but also the withdrawal of the gold that the Fund had on general deposit in New York, the Managing Director proposed to the Executive Board that the Fund reduce by one half, to $400 million, the amount of the investment in U.S. Government securities.18 This was a more substantial and a more immediate reduction than had been envisaged earlier. On September 11, 1970 the Board took a decision approving this disinvestment.19

Income from investments for the fiscal year ended April 30, 1971 was $40 million, compared with $57 million for the fiscal year 1969/70. On April 30, 1971 the Fund’s Special Reserve totaled $406 million.

The Fund’s Budget

In reviewing developments in the Fund’s budget, we first consider the income side. Practically all of the Fund’s income in the years 1966–71 was derived from charges on balances of members’ currencies held by the Fund in excess of those members’ quotas—the charges that are described above in the section on Review of Charges. On April 30, 1971, 32 members were subject to such charges, and their payments for the fiscal year 1970/71 amounted to $128 million out of total operational income of $136 million. This income from charges was the largest ever in the Fund’s history.

From the beginning of the Fund’s operations through 1970/71, 60 members had been subject to charges.

Until the fiscal year 1969/70, that part of the Fund’s operational income which did not come from the charges on drawings outstanding resulted from service charges payable on all purchases from the Fund and, to a much lesser extent, from charges on stand-by arrangements.20 Beginning with the fiscal year 1969/70, income received in the General Account included interest payments on the SDRs held in that Account and assessments to cover the expenses of conducting the business of the Special Drawing Account. Assessments were levied on all participants in the Special Drawing Account in proportion to their net cumulative allocation of SDRs, were payable in SDRs to the General Account, and were treated in the General Account as a deduction from expenditure.

On April 30, 1971 the holdings of SDRs in the General Account amounted to $489.8 million, and for the fiscal year 1970/71 interest payments received on those holdings totaled $4 million. These payments exceeded income from service charges, which were only $3 million, compared with $13 million in the preceding fiscal year. The decrease in service charges reflected not only a decline in 1970 and 1971 in drawings from the Fund but also the fact that most of the drawings that did take place were in the gold tranche, and therefore incurred no charge.

Assessments to cover the expenses of the Special Drawing Account amounted to $0.9 million in the fiscal year 1970/71.

As drawings had attained record levels in 1968 and 1969, the Fund’s income rose markedly in 1969–71. The total operational income of $136 million in the fiscal year 1970/71, for example, was nearly three times that in the fiscal year ended April 30, 1965.

Turning to the expenditure side of the Fund’s accounts, we might note at the outset that for some twenty years the Fund’s expenditure was entirely for administration and for the acquisition of fixed property, that is, for buildings and related land costs. In the fiscal year 1964/65 the Fund began to incur expenditure of an operational nature as well. In that year the Fund started to pay interest and charges on its borrowings from members under the General Arrangements to Borrow and, commencing in 1966/67, similar payments and charges in respect of its bilateral borrowing from Italy. These payments were made in gold. In 1970/71 they amounted to $12 million.

In addition, beginning in the fiscal year 1969/70 the Fund was required under the amended Articles of Agreement to pay remuneration to members with creditor positions, that is, to those members that had super gold tranche positions in the Fund. This remuneration, uniform for all members eligible to receive remuneration, was to be at a rate of 1½ per cent per annum. The Fund might increase or reduce this rate, provided that a three-fourths majority of the total voting power had approved an increase above 2 per cent per annum or a reduction below 1 per cent per annum. This remuneration was to be paid in gold or in a member’s own currency, as determined by the Fund, but in April 1970 the Executive Board decided that remuneration could also be paid in SDRs at the option of a member.

The Fund paid remuneration amounting to $27 million in the fiscal year 1969/70 and to $37 million in the fiscal year 1970/71. The rate of this remuneration was determined partly by the rate of the distributions of net income that were voted in 1968, 1969, and 1970, discussed in the following section.

In the fiscal years 1969/70 and 1970/71, the Fund’s expenditure on operational account was greater than its expenditure on account of administration and property. Since administrative and fixed property expenditure had also been growing, reaching $39.9 million in the fiscal year 1970/71 compared with only $17.6 million six years before, the total of the Fund’s expenditure went up faster from 1964/65 to 1970/71 than had the Fund’s income. Total administrative and operational expenditure in the fiscal year 1970/71 came to $89.2 million, more than four times the expenditure in 1964/65.

Subtracting expenditure from income, of course, we obtain the resulting “net income.” Readers of the earlier history will perhaps recall that, with the exception of the fiscal year 1947/48, the Fund operated with annual losses from the beginning of its activity in 1946 through the fiscal year 1956/57. Losses were charged to the Fund’s capital. Starting with the fiscal year 1957/58 and continuing through the fiscal year 1970/71, the Fund consistently had a surplus of income over expenditure, and in many years the surplus itself exceeded total expenditure. In 1968/69 the Fund’s net income reached $70.8 million, the highest in its history through fiscal 1970/71.

At the end of each month surpluses were transferred provisionally to the General Reserve, which had been established in April 1958. Final action approving the transfers was taken by the Board of Governors at Annual Meetings. At the end of the fiscal year 1967/68, that is, on April 30, 1968, the General Reserve amounted to $291.3 million. Thereupon, for the first time, the Executive Board recommended to the Board of Governors that there be a distribution of income to members. This distribution of income was approved in October 1968. Similar distributions were made after the close of the fiscal years 1968/69, 1969/70, and 1970/71. Still, on April 30, 1971 the balance in the General Reserve was $378 million.

However, during the five months May–September 1971, the Fund, for the first time since 1956/57, ran a deficit. The cumulative expenditure in the General Account for those five months was in excess of income by about $500,000. The financing of a new building made for unusually large fixed property expenditures. These fixed property expenditures were superimposed on the operational expenditures of remuneration on members’ creditor positions and interest and charges on borrowings by the Fund. Nonetheless, in the opinion of the staff this excess of expenditure over income could be regarded as an administrative deficit, and with the agreement of the Executive Board it was charged against the Special Reserve.

Table 14 at the end of the chapter gives details of the Fund’s income and expenditure and resulting net income for each of the six fiscal years 1965/66–1970/71.

Table 14.Income and Expenditure of Fund, Fiscal Years Ended April 30, 1966–71(In millions of U.S. dollars)
196619671968196919701971
Operational income
Service and stand-by charges, etc.15.67.17.414.613.03.2
Charges on balances in excess of quotas65.782.582.0107.4124.7128.1
Interest on holdings of SDRs0.44.3
Total operational income181.389.689.4122.0138.1135.6
Deduct: operational expenditure Remuneration27.237.4
Other16.117.811.922.319.111.8
Net operational income65.271.877.599.791.886.3
Budgetary expenditure215.018.121.324.428.633.2
Deduct: expenses assessed participants for cost of operating the Special Drawing Account0.90.9
Fixed property expenditure (building costs)5.73.30.54.56.57.5
Total budgetary and fixed property expenditure20.721.421.828.934.239.9
Net income344.550.455.770.857.646.4

Excludes income from investments transferred to the Special Reserve.

The composition of the administrative budget can be found in the appendices of the Annual Reports.

Components may not add to totals because of rounding.

Excludes income from investments transferred to the Special Reserve.

The composition of the administrative budget can be found in the appendices of the Annual Reports.

Components may not add to totals because of rounding.

Net Income Is Distributed

The amendment of the Articles of Agreement to provide for payment of remuneration on members’ creditor positions, to which reference was made in Chapter 13, was preceded by suggestions for several years that the Fund make some payment to these members, that is, to members having super gold tranche positions in the Fund. Indeed, there had been suggestions for payment to members on their gold tranche positions. As early as January 1965 the Managing Director and the Deputy Managing Director discussed the possibility of such payment informally and asked the staff to look into the question. Throughout the next year or so, because of questions that were being asked by members that had elected them, Mr. Saad and Mr. Yaméogo raised the same issue with the management. Some of the Middle Eastern members, not needing to make use of the Fund’s resources and in no need of additional reserve positions in the Fund, were reluctant to take up increases in their quotas or to allow their currencies to be used for purchases by other members. Several African members did not like losing interest on the reserves which they had held in French francs until they converted these reserves into gold tranche positions in the Fund.

Early Deliberations

In August 1966, when the staff proposed that the Executive Directors recommend to the Board of Governors that the net income for the fiscal year 1965/66 be allocated to the General Reserve, as had customarily been done, and that this recommendation be agreed, as in the past, through the lapse of time procedure, Mr. Eklöf, supported by Mr. Biron, requested a discussion by the Board. At the Board meeting, Mr. Biron, Mr. Eklöf, Mr. Handfield-Jones (Canada), and Mr. Larre (France) favored payments of some return on members’ creditor positions in the Fund. But others—Mr. Anjaria (India), Mr. Lieftinck, and Mr. Saad—wanted a careful examination of the issue of paying “dividends” to members. The Deputy Managing Director, who was Acting Chairman, stressed the need for quick action on the disposition of the net income for the fiscal year 1965/66, and the Executive Board agreed to defer study of the question of payments on creditor positions and to let the net income for 1965/66 be transferred to the General Reserve. Meanwhile, the Deputies of the Group of Ten had also recommended that the Fund study the possibility of paying remuneration on super gold tranche positions.

Although two staff papers on the distribution of net income were circulated to the Executive Directors at the end of 1966, the Board was not ready for formal consideration of the question until the following August. The discussion at that time revealed that, although most of the Directors were prepared to go ahead with some payment on super gold tranche positions, there were important differences of view on amounts and technique. Since the Articles did not provide for regular remuneration, some Executive Directors—including Mr. Handfield-Jones, Mr. Mansour, Mr. Suzuki, and Mr. vom Hofe (Federal Republic of Germany)—wanted the preferential distribution of net income allowed by the Articles of Agreement (2 per cent per annum) to be made retroactive, that is, to be based on the extent to which members had been creditors during the last few years. But others—including Mr. Dale and Mr. Stone—felt strongly that distribution of net income should not be related to the number of years in which a member had had a net creditor position. Distribution should rather be made at a uniform rate to all members that had been net creditors within the fiscal year in question. Otherwise, as Mr. Dale pointed out, members that had been creditors in the distant past might justifiably feel aggrieved. Most Executive Directors realized that the only satisfactory way for the Fund to pay interest or dividends—or whatever it might be called—on creditor positions was to amend the Articles so as to require the payment of remuneration on net creditor positions and to make such remuneration a cost of the Fund’s business, deductible from gross income prior to calculating net income.

These differences of opinion prevented the Executive Board from agreeing on a distribution of the net income, even somewhat retroactively, for the fiscal year ended April 30, 1966. Since an allocation of net income to reserves that was only provisional presented legal complications, the following year the Executive Board again agreed to recommend to the Board of Governors that the net income for the fiscal year 1966/67 be allocated to the General Reserve. However, the Executive Directors put the Board of Governors on notice that some recommendation for distribution of net income in the next fiscal year might well be forthcoming and that provision for remuneration was likely to be incorporated in the proposed amendments to the Articles.

By July 1968, when it was time for the Executive Board to agree on a recommendation for the disposition of the net income for 1967/68, the amendments to the Articles had been approved by the Board of Governors (although they had not yet entered into effect). The amendments contained both a provision for remuneration and a change in the provision for distribution of net income in order to assure payment of remuneration up to 2 per cent per annum. The rate of remuneration was to be the same as the return on holdings of SDRs, in order that super gold tranche positions would not receive a rate of interest higher than that paid on SDRs.

Accordingly, the Executive Board recommended that, at the 1968 Annual Meeting, the Board of Governors should approve a distribution to members with net creditor positions of part of the Fund’s net income earned during the fiscal year ended April 30, 1968, the distribution to be at a rate of 1½ per cent on the amount by which 75 per cent of the member’s quota exceeded the Fund’s average holdings of the member’s currency during the fiscal year. The Board of Governors approved this action on October 4, 1968, and thereafter distribution of $37.5 million was made to 33 members.

Mr. Mentré had proposed that the whole of the net income for 1967/68 should be transferred to the ida as a fund for helping to stabilize prices of primary products, but most Executive Directors argued that the Fund had no such power.

In the fiscal year ended April 30, 1969 the Fund’s net income rose to a record high figure of $70.8 million, and in July 1969 the Executive Board again recommended a distribution at the rate of 1½ per cent, which came to $31.9 million. Some Executive Directors favored a 2 per cent distribution. However, Messrs. Madan, Mansour, and Williams suggested that any excess funds the Fund might have should be used to assist developing members. Alternatively, the Fund’s charges might be reduced.

Discussions Are Widened

The Executive Directors’ next discussion of the distribution of income coincided with their first annual review of the Fund’s reserves, a review which they had requested in 1969. When they met to consider income distribution in July 1970, they had before them a staff paper which discussed both the distribution of the net income for 1969/70 and the General and Special Reserves. By that time, too, the amendments to the Articles of Agreement, containing, inter alia, the new provisions for remuneration, had become effective and the Fund had paid remuneration at the rate of 1½ per cent per annum for the period July 28, 1969, the date the amendments took effect, through April 30, 1970. The staff proposed a distribution of the income for 1969/70 that would raise the total amount received by members on their net creditor positions during that fiscal year to an amount equivalent to 1½ per cent per annum on those positions, taking into account the remuneration already paid. Such a distribution would amount to $6.3 million and would be consistent with the rate of return of 1½ per cent per annum on net creditor positions, which had been the basis of the distribution of net income for the two previous fiscal years.

A number of members of the Executive Board—Messrs. Johnstone, Plescoff, Stone, Schleiminger, and de Vries—had difficulty with this proposal. They thought that the Fund’s total reserves of $700 million and the current net income of $51 million permitted larger payments to members with net creditor positions. Mr. Johnstone said that members were becoming aware of the cost of making their currencies available to the Fund, and suggested that the return on net creditor positions be raised to 2 per cent. Mr. Stone agreed; in fact, he wanted to go even further by having an additional general distribution of net income to all members on the basis of quotas. In the latter idea he was supported by Mr. Mansour.

On the other hand, Messrs. Arriazu, Madan, Phillips O., Plescoff, Williams, and Yaméogo argued for transferring a portion of the Fund’s net income to either the ida or the World Bank. The General Counsel said that he did not believe that making a loan or grant to the ida could be legally sustained under the Articles of Agreement, but that there might be legal authority for the Fund to invest in World Bank bonds. After discussion, the Executive Board decided to recommend to the Board of Governors a distribution of the net income for the fiscal year 1969/70 that would raise the total return to each member with a net creditor position to 2 per cent. On September 25, 1970 the Board of Governors approved this recommendation and $17.5 million was thereafter distributed to 34 members, 14 of which opted to receive SDRs instead of their own currency.

By mid-1971, when it was time for the next annual discussion of what part of the Fund’s net income should be allocated to reserves and what part, if any, should be distributed, the Legal Department had prepared a paper directed to answering the questions whether the Fund had the legal authority (1) to make grants of its income to international development agencies and (2) to invest amounts equivalent to net income in securities issued by such agencies after these amounts had been placed in reserves. The conclusion was that the Fund could not make its assets available to another organization, but that the Fund could invest in the securities of other agencies or of members, subject to certain safeguards.

The staff’s recommendation for the disposition of the net income of $46.4 million for the fiscal year 1970/71 took into account the views expressed by the Executive Directors on this subject in the previous year, and was for a distribution to members with net creditor positions that would raise the total amount received by those members from both remuneration and a distribution of net income to 2 per cent. Remuneration for 1970/71 had already been paid at the rate of 1½ per cent, amounting to $37.4 million. Another $12.5 million would be distributed, bringing the total to $49.9 million.

When the Executive Board considered this recommendation in August 1971, there had been a turnabout in the Fund’s finances for the first time since 1956/57. A deficit for 1971/72 of about $22 million was envisaged. Most of the Executive Directors were fully in accord with the proposal to distribute net income at a rate of ½ of 1 per cent, so as to raise to 2 per cent the total amount received as remuneration and net income by members with net creditor positions. Mr. Brand (Australia) made a case for a general distribution to all members of $20–25 million, or 0.08 per cent of quotas, but most Executive Directors were reluctant to support such a distribution in view of the contemplated deficit. Mr. Suzuki and Mr. Lieftinck stated explicitly that they did not consider the Fund’s reserves too high. As in past discussions of this subject, Mr. Lieftinck was more inclined to put the Fund’s net income into reserves than to distribute it.

The Executive Board recommended distribution of net income for 1970/71 at the rate of ½ of 1 per cent.

In addition, the Executive Directors requested that the staff prepare a follow-up paper to the one just mentioned which would clarify the precise policy issues involved in the Fund’s investing a portion of its net income in the securities of agencies financing economic development, such as the World Bank. But the Managing Director stressed that the Executive Directors were not asking the staff to make specific proposals; therefore, in the absence of further discussion by the Executive Board, the question about the Fund’s investing in World Bank bonds or any similar arrangement would remain unanswered.

The Board of Governors approved the distribution and the Fund distributed $12.5 million to 39 members, of which $8.3 million was paid in SDRs to 21 members.

Turnabout in Financial Operations

The seven chapters in this Part give the details of a broad story—that of a sharp U-turn in the Fund’s financial operations and transactions. From 1966 to 1969 a number of factors made for an unprecedented use of the Fund’s financial resources: a persistent U.S. deficit; a recurrent U.K. deficit; a French deficit in 1968–69; stagnation in the growth of traditional reserves with which to finance these deficits; and unfavorable trade situations for many developing countries. The resulting call on the Fund’s resources reached $6 billion in the calendar years 1968 and 1969 as Belgium, Canada, Denmark, France, the Federal Republic of Germany, the United Kingdom, and the United States, among industrial members, all drew on the Fund. Furthermore, because gold tranche drawings had become automatic under the amended Articles of Agreement, because the compensatory financing facility had been extended and liberalized, and because a new buffer stock financing facility had been instituted, expectations were for still greater use of the Fund’s financial resources.

In these circumstances, the Executive Directors, the management, and the staff up until 1970, even while proceeding with efforts to introduce and activate SDRs, sought ways in which to augment the Fund’s regular financial resources. Additional currencies were made available for purchases. The General Arrangements to Borrow were renewed for a second time and made applicable to drawings for all participants, including any gold tranche drawings. The possibility of more bilateral borrowing from members was explored. Quotas were enlarged by an amount much greater than had been added by previous rounds.

In 1970 and 1971, however, the international financial picture was completely altered. Because of the huge official settlements deficits in the U.S. balance of payments in both years, international reserves had risen by exceptional and disquieting amounts, attaining annual increases unknown since World War II. These reserve increases were additional to the increases in global reserves through the allocations of SDRs at the beginning of 1970, 1971, and 1972 that had been planned earlier. Nearly all countries shared in tremendous increases in world reserves, although by no means evenly.

Consequently, except for drawings in 1971 by the United States, few members had recourse to the Fund after 1970. On the contrary, repurchases began to exceed purchases and the Fund repaid all of its indebtedness.

Until August 1971 the Fund had been able to run surpluses and to add to its reserves. Charges on the very large drawings of 1968 and 1969 had greatly augmented income, so that despite new operational expenditures, including the payment of remuneration on members’ creditor positions, income considerably exceeded outgo. Reserves had grown to nearly $800 million by April 30, 1971. This solvent position led to decisions to distribute in 1968, 1969, and 1970 some of the Fund’s net income to members with net creditor positions and to disinvest early in 1972 the gold that the Fund had, in more stringent times, placed in interest-bearing U.S. Government securities.

As drawings from the Fund diminished in 1970 and 1971, the Fund’s income was reduced. The cash financing of a new building led in August 1971 to a budgetary deficit. At first the deficit seemed temporary. But by the end of 1971 it appeared likely that large deficits might emerge in at least the next two fiscal years, and it was clear that there had been a turnabout in the Fund’s financial accounts. The renewed deficits in the Fund’s accounts were to elicit some critical comment from monetary officials and the financial press, especially after 1971 when the Fund’s deficits coincided with a decrease in its financial operations and its role in exchange rate adjustments, and when discussions about international monetary reform became stalemated. It may, therefore, be worthwhile to put together here the consequences for the Fund’s expenditures and its income of a number of decisions taken in the period reviewed in this volume: Apart from the nonrecurrent expenditures in the early 1970s for the acquisition of a new building, higher built-in expenditures by the Fund had resulted from the provision of the amended Articles of Agreement that remuneration be paid to members with net creditor positions regardless of the Fund’s current income. Even more crucial for the Fund’s budgetary position were several decisions that made for relatively low income, such as decisions to retain the same low charges on purchases, to make gold tranche drawings available automatically and without a service charge, and to forgo the income received from investing gold in U.S. Government securities.

Belgium, Canada, France, the Deutsche Bundesbank, Italy, Japan, the Netherlands, the Sveriges Riksbank, the United Kingdom, and the United States.

E.B. Decision No. 2858-(69/96), October 17, 1969; Vol. II below, p. 209.

E.B. Decision No. 2377-(67/85), November 17, 1967; Vol. II below, p. 209.

E.B. Decision No. 3363-(71/60), July 7, 1971; Vol. II below, p. 210.

E.B. Decision No. 2151-(66/66), August 3, 1966; Vol. II below, p. 211.

Opening Address by the Managing Director, Summary Proceedings, 1968, pp. 26–27.

E.B. Decision No. 1345-(62/23), May 23, 1962, as amended by E.B. Decision No. 2620-(68/141), November 1, 1968; Vol. II below, pp. 197–98.

For details, see Gold, Stand-By Arrangements, pp. 127–32.

E.B. Decision No. 3010-(70/25) G/S, March 25, 1970; Vol. II below, pp. 219–20.

See above, Chap. 11, pp. 229–30, Chap. 14, pp. 262–63, and Chap. 13, pp. 258–59.

E.B. Decision No. 3049-(70/44), May 20, 1970; Vol. II below, pp. 207–208.

E.B. Decision No. 3314-(71/33), April 21, 1971; Vol. II below, p. 208.

E.B. Decision No. 705-(57/55), November 7, 1957; History, 1945–65, Vol. III, p. 245.

E.B. Decision No. 2499-(68/77), April 19, 1968; Vol. II below, p. 208.

E.B. Decision No. 321-(54/32), June 15, 1954, as amended in 1961 and 1971; Vol. II below, pp. 193–94.

History, 1945–65, Vol. I, p. 463.

E.B. Decision No. 488-(56/5), January 25, 1956, as amended by E.B. Decision No. 2844-(69/90), September 19, 1969; Vol. II below, pp. 223–24.

The Fund’s general deposits of gold are discussed in Chap. 20.

E.B. Decision No. 3132-(70/87), September 11, 1970; Vol. II below, p. 224.

The proceeds of charges from a stand-by arrangement were not considered as income to the Fund until the arrangement expired or was canceled. Under the Fund’s procedures, during the life of such an arrangement refunds and other adjustments could occur, depending on the extent to which drawings actually took place under the arrangement and on the changes that occurred in the level of the Fund’s holdings of a member’s currency while the arrangement existed.

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