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IMF History (1966-1971) Volume 1
Chapter

Chapter 26: Road to the Smithsonian Agreement (August 16–December 18, 1971)

Author(s):
International Monetary Fund
Published Date:
February 1996
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Monetary Affairs Were in a Critical State following the U.S. announcement of August 15, 1971. On Monday morning, August 16, most of the world’s exchange markets were closed: it was unclear what exchange rates would prevail or how they would be determined. There was an urgent need for monetary officials to decide what to do in the new circumstances.

Fund’s Immediate Response to U.S. Announcement

The Managing Director had been invited to come to the U.S. Treasury on Sunday evening, August 15. He was accompanied by the Deputy Managing Director, Mr. Southard. They were informed by the Under Secretary for Monetary Affairs, Mr. Paul Volcker, of the actions that President Nixon would be announcing from the White House on radio and television in less than an hour. The Secretary of the Treasury, Mr. Connally, was at the White House. The U.S. monetary authorities told the Fund’s management that no one else had been given advance notice of the U.S. actions, and that they did not have in mind a package of proposals, including exchange rate adjustments, to be discussed with officials of other countries. They had acted on the belief that they could not negotiate a new structure of exchange rates while they were maintaining gold sales against officially held dollars.

Mr. Schweitzer and Mr. Southard commented that the 10 per cent import surcharge was likely to cause consternation among the officials of other countries and that a realignment of exchange rates could be anticipated but would be a complicated negotiation. They also explained that the staff of the Fund had done some work on exchange rate relationships among the major currencies.

As was their custom during the last two weeks of August, the Executive Directors were in informal recess. Nonetheless, a Board meeting was called for Monday morning, August 16, and on that day there were both morning and afternoon sessions; several of the Executive Directors were on vacation and were represented by their Alternates. The Managing Director pointed out that the U.S. announcement raised two issues. The first concerned the action that the Fund should take with respect to the communication sent by the U.S. Secretary of the Treasury. The second issue was a broader one. It had been evident for some time that the prevailing pattern of parities was a major cause of the persistent imbalances in international payments. The actions of the U.S. authorities opened up the possibility of dealing in a fundamental way with the pattern of exchange rates and thus of attacking one of the basic causes of the disequilibrium in international payments. Mr. Schweitzer believed that a new pattern of parities was required and that it should be agreed on quickly, and he reported that the staff had been giving consideration to the changes in exchange rates that would permit a better balance in international payments. He added that, while the central focus would be on a new structure of parities, consideration might also be given to the question whether somewhat wider margins might be permitted temporarily.

Mr. Schweitzer believed that it was necessary that early decisions be taken on rates of exchange for currencies in terms of each other and in terms of gold, if for no other reason, because new agreed rates were needed to permit the effective functioning of the Fund’s General Account and Special Drawing Account. While the present uncertainty prevailed, transactions in both Accounts might have to be halted, a situation that could not be allowed to continue for any length of time.

The problems for the Fund’s transactions to which Mr. Schweitzer referred have already been described in Chapters 12 and 17. In brief, the Fund’s financial transactions and operations were being hampered by three circumstances. One, the widespread expectation that the future price of gold and of SDRs in terms of currencies might increase was inducing members to reduce their liabilities to the Fund and to avoid any decrease in their SDR holdings and their reserve positions in the Fund. Two, the exchange rates for almost all of the currencies that the Fund would use in drawings and repurchases and other transactions under its regular procedures were not being effectively maintained within the margins around par values established under the Articles or decisions of the Fund, and the decision on fluctuating currencies had been applied only to the three currencies that were floating before August 15, 1971. As a result, purchases and repurchases through the General Account could not be effected in the usual way on the basis of agreed par values or of provisionally agreed exchange rates, and transactions in the Special Drawing Account could not be conducted on the basis of representative exchange rates.1Three, in the absence of agreed arrangements for convertibility, difficulties might be encountered by members in using currencies which they held in their reserves, but which could not be accepted by the Fund, in the acquisition of other currencies that were needed for their transactions with the Fund. In addition, without agreement on the values to be used for currencies and gold, there was a problem concerning the valuation of the Fund’s assets.

The reactions to the U.S. actions expressed by the Executive Directors on August 16 exemplified the initial reactions of most monetary officials. There was, in effect, an atmosphere of crisis. Many Executive Directors pressed Mr. Dale about the intentions of the U.S. authorities, especially in regard to the exchange rate situation that was likely to arise immediately, and regarding the import surcharge. Several believed that new par values would have to be negotiated urgently, that is, within the next few days. When the Executive Directors took up a draft decision containing the Fund’s reply to the U.S. communication, Mr. Dale explained that the U.S. authorities believed that the U.S. action was essential in order to induce momentum among industrial countries on exchange and trade measures that were basic to correcting the imbalance in world payments. Hence, they preferred that the Fund not take any decision at this time. Mr. Viénot had an opposite view, expressing surprise that in the draft decision the Fund only “took note” of the U.S. actions; he preferred the Fund to express its disagreement with the U.S. action, which, he contended, constituted “a clear deviation from the Articles of Agreement.”

It was not until Friday, August 20, after considerable discussion during the week, that the Executive Directors, including Mr. Dale, were able to agree on a decision. The text of the decision, which was cabled to all members was as follows (the decision was also made public in Press Release No. 853):

1. The United States authorities, in a letter from the Secretary of the Treasury to the Managing Director, have notified the International Monetary Fund “that, with effect August 15, 1971, the United States no longer, for the settlement of international transactions, in fact, freely buys and sells gold under the second sentence of Article IV, Section 4 (b). The United States will continue to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations” The Fund notes that exchange transactions in the territories of the United States have been occurring outside the limits prescribed by Article IV, Section 3, and the actions taken by the United States authorities do not at the present time ensure that transactions between their currency and the currencies of other members take place within their territories only within the limits prescribed by Article IV, Section 3.

2. The Fund notes the circumstances which have led the United States authorities to take the actions described above. The Fund emphasizes the undertaking of members to collaborate with it to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations, and therefore welcomes the intention of the United States authorities to act in accordance with this undertaking.

3. The Fund will remain in close consultation with the authorities of the United States and of the other members with a view to the prompt achievement of a viable structure of exchange rates on the basis of parities established and maintained in accordance with the Articles of Agreement. The Managing Director will take appropriate initiatives to this end.

Exchange Rate Realignment—A Sensitive Issue

The second issue to which the Managing Director referred in the Executive Board meeting of August 16—that of realignment of the exchange rates of the major industrial nations—was an extremely sensitive one. There were many officials and economists who regarded the U.S. dollar as overvalued, at least in relation to some of the currencies of the eec countries—such as the deutsche mark, the Netherlands guilder, and the Belgian franc—and in relation to the Japanese yen. At a minimum it was now generally recognized that a realignment of the par values of the industrial countries had somehow to be achieved. Just how the readjustment of exchange rates was to be effected, however, was not so clear. Although there had been informal hints at least as far back as 1968 that countries with surpluses should revalue their currencies vis-à-vis the dollar, the authorities of the countries experiencing the most protracted surpluses—the Federal Republic of Germany and Japan—fearing that reduced levels of exports might endanger their rates of economic growth, continued to be very reluctant to do so. Moreover, monetary officials of most of the eec countries, centering attention on the prolonged balance of payments deficit of the United States, had for some time considered a change in exchange rates through an increase in the dollar price of gold to be essential. Because of the severe aggravation of inflationary pressures in the United States and the substantial enlargement of the U.S. balance of payments deficit following a sizable expansion of U.S. military expenditures in Viet-Nam, European officials believed more strongly than ever that corrective action was up to the United States.

U.S. Position on Dollar Devaluation

The management of the Fund had been in touch informally with the U.S. authorities throughout the first seven months of 1971, especially after the first week of May, and knew the position of the U.S. authorities to be sharply different from that being expressed by European officials. Moreover, as the speeches reported in the preceding chapter indicate, the U.S. authorities had begun openly to state their views. They took the position that the responsibility for correcting the chronic imbalances in international payments—the U.S. deficit on the one side and the surpluses of several other industrial countries on the other side—ought to be shared. More explicitly, they believed that the U.S. payments deficit resulted at least partly because the United States for many years had been shouldering a very heavy share of the defense costs of Western Europe, Japan, and other militarily allied countries, and because the trading arrangements of the eec and of Japan did not permit the liberal entry of U.S. goods. Therefore, countries with surpluses ought to revalue their currencies and some concessions ought to be made in respect of military burden-sharing and trading arrangements. Especially was it imperative that changes be made in the common agricultural policy of the eec, which was hampering U.S. exports of agricultural goods to European countries, and in restrictions on imports by Japan, which were preventing a correction of the large U.S. trade deficit with that country.

In addition to wanting action on these broad fronts, the U.S. monetary authorities had another problem—how to attain a realignment of the exchange rates for the major currencies without changing the dollar price of gold. They had stated on a number of occasions, and again on August 15, 1971, that they would not devalue the dollar. (De facto depreciation of the dollar vis-à-vis other major currencies that might take place in exchange markets following the suspension of official convertibility was not, of course, devaluation in terms of gold. Indeed, market depreciation of the dollar against other currencies could be construed as tantamount, economically, to appreciation of other currencies in terms of the dollar.)

The way in which the par value system had been implemented since its establishment made it difficult for the United States to take action on the exchange rate for the dollar. Market intervention was the main technique by which members of the Fund ensured that spot rates between their currencies and the currencies of other members stayed within prescribed margins around par values. Thus an intervention currency was necessary, and margins came to be defined in terms of the intervention currency. As the strongest convertible currency after World War II, the dollar rapidly became the principal intervention currency and the currency in terms of which most margins were stated. The United States, for its part, fulfilled its exchange rate obligations by opting to buy and sell gold freely—that is, without limit—for the settlement of international payments. In these circumstances, the United States assumed a basically passive role in the exchange market: exchange rates of other currencies vis-à-vis the dollar were determined not by U.S. actions but by actions of the central banks of other countries.

Because of this operation of the par value system, there was a belief on the part of some officials that there was no method by which the United States could actually devalue the dollar. In fact, some knowledgeable monetary officials believed that the par value system had to function in this way under the Fund’s Articles of Agreement and that in effect the Articles of Agreement, which contained a definition of the dollar in terms of gold, even precluded a change in the dollar price of gold.

But, more importantly, there were a number of basic economic reasons why devaluation of the dollar by raising the price of gold was being avoided. For one thing, it was considered possible that other countries would also raise the price of gold in terms of their currencies, thereby undoing the desired effect of realigning the dollar vis-à-vis these other currencies. Moreover, the dollar was the major reserve currency of the world. For a number of reasons, many countries had accumulated large holdings of dollars since World War II. To avoid jeopardizing the stability of the dollar, several countries, especially after 1965, had refrained from exercising their right to convert these holdings into gold. Devaluation of the dollar would have an adverse effect on the value of countries’ reserves of dollars.

There was another consideration governing the attitudes of the U.S. monetary authorities toward devaluation of the dollar—that an appropriate realignment of the dollar vis-à-vis the currencies of other industrial nations might well have to be considerably larger than those countries were prepared to accept. In their view, it was imperative that the U.S. deficit be converted into a surplus, at least for a few years. Should the dollar be devalued in 1971 and the size of the devaluation prove to be too small, perhaps because other countries would not initially be prepared to agree to a large enough change, it would be extremely awkward, and would shake confidence in the dollar, to devalue it in terms of gold again later.

The adverse reactions in the United States to the possibility of a formal devaluation of the dollar were strengthened by still another factor. There were many U.S. officials and economists who firmly opposed any action that might enhance the role of gold in the international monetary system; hence there was concern, and even anxiety, that an increase in the official dollar price of gold incidental to a devaluation of the dollar in terms of other currencies might have such an effect. The risk of enhancing the status of gold in the monetary system was believed to be especially great if there should have to be a second devaluation of the dollar.

Over time, the conviction had grown in U.S. Government circles that the only way in which the United States could take action on the rates of exchange between the dollar and other currencies was to break the link between the dollar and gold. For instance, the report of the President’s Commission on International Trade and Investment Policy, submitted to the President in July 1971, pointed out that the problems of the deteriorating trade balance were compounded by the dollar’s pivotal role in the monetary system as an intervention currency and a reserve currency; therefore, the United States did not have ready recourse to the remedy of a change in its exchange rate. The report of the Subcommittee on International Exchange and Payments of the Joint Economic Committee of Congress likewise emphasized that the legal link between the dollar and the price of gold and the role of the dollar as the chief intervention currency effectively limited any U.S. initiative to alter dollar exchange rates, and, in effect, suggested the need to break that link.2

The Staff’s Calculations

For some years the staff of the Research Department of the Fund had been developing a multilateral exchange rate model (merm) designed to analyze the effects of changes in exchange rates on foreign trade flows.3 Early in 1971 the staff began to use the model to examine the implications for international payments imbalance of realignments in the exchange rates of the major currencies and made calculations for changes in the exchange rates of the 11 currencies of the countries of the Group of Ten and Switzerland that would correct existing imbalances on current account.

At the afternoon session of the Executive Board on August 16, the Economic Counsellor presented the staff’s thinking on the relative exchange rates of the currencies of the major industrial nations. He divided the subject into two parts: (1) the determination of the relative exchange rates of the major currencies, a determination that affected the competitiveness of countries in international transactions and the relative value of reserves held in various currencies; and (2) the link between the pattern of exchange rates and gold, a link determined by specifying the price of gold in terms of one of the currencies involved, presumably the dollar. This second part affected the value of gold, SDRs, and reserve positions in the Fund that were in the form of currencies. The Economic Counsellor said that, although he was addressing himself only to the question of relative exchange rates, he considered it more likely that agreement could be reached if the questions concerning relative exchange rates and gold were settled at the same time.

The Economic Counsellor stressed that, in his view, a “satisfactory new pattern of exchange rates could not be found by letting all currencies float for a certain period.” A regime of many floating currencies could not “even in theory be expected to lead to a viable system of rates.” Floating rates were, inter alia, too much affected by the extent to which countries imposed controls on capital movements and intervened in exchange markets, and by anticipations of official actions. It was necessary, therefore, to derive a new pattern of exchange rates on the basis of analysis. Here, he emphasized that to create a sufficiently large current account surplus in the U.S. balance of payments would require an adequate average depreciation of the U.S. dollar against other currencies. The staff’s analysis suggested, he said, that a decline in the value of the U.S. dollar in terms of other currencies on the average of approximately 10 per cent would be sufficient for this purpose. It would not be appropriate, however, to adjust the rates of the U.S. dollar in terms of all currencies by the same percentage. For some currencies, the relative appreciation in terms of the dollar should be less than 10 per cent; for others, an appreciation somewhat in excess of 10 per cent would appear appropriate.

Although secret, some of the figures in the staff’s calculations appeared on the wire services the following week and were cited in the press as the exchange rate changes that the Fund believed were necessary. Because of the sharply differing points of view on the part of monetary officials concerning the exchange rate action they believed desirable, the revelation of these figures caused considerable repercussions in the press and reportedly affected trading on exchange markets. The Managing Director publicly denied that these calculations had any authenticity, explaining that they were only working calculations of the staff. A subsequent investigation by Mr. Schweitzer did not reveal the source of the leak.

Mr. Schweitzer’s Concerns and Responses

At a meeting in Brussels on August 19, 1971, the Finance Ministers of the eec decided that a reform of the international monetary system, including a restructuring of par values, was necessary, and that to this end they would take “a common initiative” within the appropriate international institutions, naming the Fund in particular. Meanwhile, to enable exchange markets to reopen on Monday, August 23, they agreed that the rates between the U.S. dollar and five of the six currencies of the eec countries—the Belgian franc, the deutsche mark, the Italian lira, the Luxembourg franc, and the Netherlands guilder—would be freely determined in exchange markets; there was to be a dual market for the French franc (see the following section). They further agreed that the eec countries would work out among themselves techniques for market intervention in order to minimize the degree of rate fluctuation among their own currencies. They emphasized that it was important for the operation of eec agricultural policy that fluctuation among the rates for their own currencies be limited. The common agricultural policy, in turn, was indispensable for the achievement of greater economic and monetary union among the six countries of the eec.

The Managing Director was apprehensive lest, in the existing circumstances, the international monetary situation deteriorate beyond repair. If exchange markets reopened on August 23 on their own terms, there was not the slightest chance, he thought, that the rates quoted would bear any resemblance to an appropriate pattern of exchange rates. Morever, if the U.S. import surcharge was retained for long, it would distort trade and make the achievement of a satisfactory pattern of rates difficult, if not impossible. There was, he believed, a real danger that countries might resort to restrictions on trade, exchange controls, and multiple exchange rates, such as had prevailed in the late 1940s and early 1950s, and which would be very hard to remove. Yet, as he remarked to the Executive Directors on Thursday, August 19, the U.S. authorities did not appear to be in a hurry to bring the existing difficulties to an end, nor did the eec countries seem to have agreed on a solution.

The situation presented serious problems not only for the industrial countries but also for the developing and other primary producing members, which were worried about the adverse effects of exchange rate fluctuations, the accompanying uncertainties, and the U.S. import surcharge. Many of them were unsure what exchange rate policies to pursue and were asking for advice from the management and staff of the Fund. Mr. Schweitzer was also concerned that the vast majority of countries would not have a chance to participate in any solution.

Keeping in close communication with the Executive Directors and with the top officials of the eec, the bis, and the Group of Ten, the Managing Director in consultation with the senior staff formulated his positions. The staff of the Research Department had already been working not only on a possible new pattern of exchange rates but also on ways in which the operation of the international monetary system might be improved. The staff of the Legal Department had been working on draft amendments to the Articles of Agreement governing changes in exchange rates and margin requirements, as was described at the end of Chapter 24, and on other possible changes in the Articles. The General Counsel proposed a program of work that would encompass the study by the Executive Directors of all alternatives for a reformed international monetary system, including proposals that would involve the broadest kinds of amendments to the Articles of Agreement. The Economic Counsellor presented the calculations discussed above and put forward for consideration by the Executive Directors a paper outlining a new framework for the monetary system. The Area Departments examined the implications for all members of a realignment of the currencies of the major industrial members. The Treasurer’s Department and the Legal Department suggested ways to adjust the Fund’s holdings of currencies and to continue operations in the General Account and the Special Drawing Account.

Several Initiatives

Thus, when Mr. Schweitzer addressed the Executive Board on August 19, he stressed that the whole of the international monetary system was at stake and that he thought the Fund could, and should, take the initiative. The Fund was in a unique position, he said, to propose a comprehensive and impartial solution to both the procedural and the substantive problems that had been raised.

As for procedure, Mr. Schweitzer regarded agreement by the major industrial countries as the first essential step. He was convinced that the Finance Ministers and Central Bank Governors of the countries of the Group of Ten should not wait until their scheduled meeting in Washington on September 26—the Sunday before the opening of the Annual Meeting of the Fund’s Board of Governors. That would be too late, he thought, for the Fund, acting through the Governors of all member countries, to take suitable action. Therefore, he would press for an earlier meeting of the Group of Ten. The question of when the Group of Ten would meet was not one which the Fund could decide, but Mr. Schweitzer told the Executive Directors that he had informed the Minister of Finance of Canada, Mr. Benson, then chairman of the Group of Ten, of his strong belief in the need for Mr. Benson to call such a meeting.

As the best possible way to coordinate the interests of the countries of the Group of Ten with those of the rest of the Fund’s members, the Fund, Mr. Schweitzer said, was prepared to invite the Group of Ten to meet at the Fund’s headquarters. He assured the Executive Directors that the Fund could present concrete proposals, which would include proposals for new relative exchange rates, the price of gold in terms of currencies, temporary wider margins, a transitional regime for convertibility, and the removal of the U.S. import surcharge.

With the Executive Board’s concurrence, the Managing Director sent a message to all Governors of the Fund on August 19. Recent developments, he cabled, gave great cause for concern but at the same time created the opportunity for strengthening the system. Unless prompt action was taken, the prospect was for disorder and discrimination in currency and trade relationships, which would seriously disrupt trade and undermine the system that had served the world well and had been the basis for effective collaboration for a quarter of a century. Piecemeal approaches to change were not likely to yield beneficial results even for a single country, much less for the whole community of countries represented in the Fund, and he considered it vitally important that action be “prompt, collective, and collaborative.” This action was the assigned task of the Fund, and the Fund was in a position to make a contribution of great importance to the establishment of a better monetary system. He intended to press for rapid progress toward agreement on appropriate exchange rates and other measures that would restore the monetary system to effective and lasting operation.

In the next few days, many of the Governors, especially those for the developing members, cabled their support of the Managing Director’s efforts. It became evident almost at once, however, that the Group of Ten was not yet ready to proceed. On Friday, August 20, Mr. Benson advised Mr. Schweitzer that there was insufficient support among the Group of Ten for an immediate ministerial meeting; he had therefore requested Mr. Ossola, then chairman of the Deputies of the Group of Ten, to convene a meeting of the Deputies “at the earliest possible date.”

Mr. Schweitzer’s grave concern about the monetary situation was revealed to the world when, in the following week, he appeared twice on television. In an interview on Monday morning, August 23—as exchange markets were reopened and a variety of exchange rates prevailed, many involving fluctuations in the rates for the U.S. dollar—Mr. Schweitzer was asked for his view about a change in the dollar price of gold as a way to improve the situation. He replied that a whole new pattern of exchange rates was necessary, and that “in my opinion it would be normal for the U.S. to make a contribution.” The next day, August 24, he was asked whether a change in the price of gold in terms of the U.S. dollar would be a major contribution to solving the international imbalance problem. He again replied in such a way as to suggest that, in a new pattern of exchange rates, the dollar might have to be redefined in terms of gold.

Mr. Schweitzer’s statements on this subject reflected his interest in currency realignment as the first essential step to improving the world monetary situation. In this regard he was especially mindful of the problems that would confront the United States if it decided to devalue. In his opinion, the view that dollar devaluation was not possible deprived the United States, alone among nations, of the use of a vital instrument of balance of payments adjustment, namely, a change in the exchange rate for its currency. Given these circumstances, Mr. Schweitzer acted on his belief that public statements by the Managing Director of the Fund could help to prepare the way for dollar devaluation and for a quick realignment of exchange rates. But there were press reports that the U.S. monetary authorities, believing that the time was not ripe for action, did not welcome public expression of views about dollar devaluation.

Variety of Exchange Rates Introduced

In the week after the U.S. suspension of official convertibility, the Managing Director also asked the Executive Directors to communicate to all member countries a statement in which the Fund called attention to the undertaking of each member under Article IV, Section 4 (a), “to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations,” and in which each member was requested to advise the Fund promptly and in detail of the exchange measures and practices applied in its territories.

It was evident from the replies that members were resorting to a number of exchange rate expedients. Several members advised the Fund that, notwithstanding their desire to maintain orderly exchange rates, they no longer found it possible to observe margins around their par values. Most of the industrial members in Europe (Austria, Belgium, Denmark, the Federal Republic of Germany, Italy, Luxembourg, the Netherlands, Norway, Sweden, and the United Kingdom) and Japan were letting the exchange rates for their currencies float. The rate for the Canadian dollar also continued to float.

The exchange rates of some European currencies and of the Japanese yen were under strong upward pressure, but the monetary authorities of these countries were intervening in the markets so as to limit upward movements.

The currencies of Australia, Burma, Iraq, Ireland, Malaysia, New Zealand, Singapore, and a number of other sterling area members were pegged to sterling, and so they too were, in effect, floating against the dollar. Several developing countries—including the Khmer Republic, the Libyan Arab Republic, Portugal, Somalia, and Viet-Nam—likewise introduced floating rates for their currencies. The rates for the currencies of Afghanistan, Brazil, Colombia, Korea, Lebanon, the Philippines, and the Yemen Arab Republic continued to fluctuate, as they had prior to August 15.

A few members introduced dual exchange markets. For example, France did so with effect from August 23, 1971. The official market was reserved for transactions for trade and trade-related items and for government exchange dealings; these transactions were to take place at rates based on the par value. A separate market—the financial market—was established for all other authorized transactions, primarily capital transactions; these were to take place at freely fluctuating rates. Capital flows into France from the end of 1970 to the end of July 1971 had totaled close to $1.5 billion. To discourage such inflows, the French authorities had already taken a variety of domestic measures, including the introduction of exchange controls over some capital transactions and the elimination of interest on short-term deposits of nonresidents. Fourteen members of the Fund that were members of the French franc area and maintained operations accounts with the French Treasury instituted dual exchange markets comparable to those in France. Other countries, too—such as Argentina, Ecuador, and the Netherlands—set up secondary markets for capital transactions in which exchange rates were to be determined by supply and demand.

Many members of the Fund, however, continued to apply the same fixed U.S. dollar rates for their currencies, although some of them widened the margins around their par values within which the dollar rates could fluctuate. Members that kept the same fixed dollar rates included most of those in Latin America, African members other than those in the French franc area, and several members in Asia, Europe, and the Middle East. Several members, including Ceylon, Ghana, India, Kenya, Nigeria, Pakistan, South Africa, the Sudan, Tanzania, and Uganda, changed the peg for their currencies from sterling to the dollar.

The French dual market was a multiple currency practice and thus, unlike a single fluctuating exchange rate, produced exchange rates in a form that the Fund could approve under the Articles. The Executive Board approved this practice until the end of 1971. Toward the end of the year, they extended that approval until the next Article VIII consultation with France.

Apart from approval of the dual market in France, the Fund was called upon to take little formal action between August 15 and mid-December 1971 with respect to individual exchange rates. Only one par value was changed: with the Fund’s concurrence, Israel devalued the pound on August 21 from 3.50 Israel pounds per U.S. dollar to 4.20 Israel pounds per U.S. dollar, a depreciation of 16.7 per cent. On September 1 the Libyan pound was replaced by the Libyan dinar, but no appreciation or depreciation was involved.

Group of Ten Meetings

Mr. Schweitzer was informed by Mr. Benson on August 25 that a meeting of the Finance Ministers and Central Bank Governors of the Group of Ten was being called for September 15 and 16 in London, and he was invited to attend. The ministerial meeting was preceded by a meeting of the Deputies of the Group of Ten in the Fund’s Paris Office on September 3 and 4. The Economic Counsellor attended the Deputies’ meeting and reported to the Executive Directors that the Deputies had considered the views of the Under Secretary for Monetary Affairs in the U.S. Treasury, Mr. Volcker, on the outlook for the U.S. balance of payments and the aims of the U.S. authorities. These aims included the restoration of a basic position of long-term equilibrium, together with a modest surplus at least for a few years in order to restore confidence in the U.S. dollar. Much attention was directed to the magnitude of the improvement needed in the U.S. balance of payments. Any lessening of the U.S. deficit necessarily had counterparts in reduced surpluses by other countries, and the implication of surpluses by the United States was deficits by other countries. Some countries now in surplus saw in any reduction of these surpluses the specter of recession. Obviously, the greater the improvement expected in the U.S. position and the more rapidly it was to be achieved, the stronger the actions that were required. Hence, important negotiations hinged on estimates of the magnitude of the turnaround to be attained in the U.S. payments position and when it was to be achieved.

Mr. Dale spelled out the details to the Executive Directors. The U.S. authorities believed that the U.S. overall balance had to be improved by at least $13 billion. The projections of the U.S. Government for 1972, in the absence of corrective measures, was for a trade deficit of about $5 billion and a deficit on basic balance, that is, a current account and long-term capital deficit, of about $10 billion. The authorities considered a $13 billion turnaround to be a minimum. It did not allow for the momentum which the pace of deterioration had gained nor for the lag which would occur before the effects of new measures, including exchange rate changes, took place. Furthermore, such a figure provided for only modest capital outflow to developing countries and for virtually no net long-term capital flow to the rest of the developed world. In particular, it assumed that Canada would not resort to the New York bond market for any great amounts and that European and other developed countries would not make much use of the New York securities market on a net basis.

On September 13, 1971, just before the ministerial meeting of the Group of Ten, the Finance Ministers of the eec countries reached agreement on the common position that they would take at the meeting. That position included, inter alia, the need for realignment against gold of the currencies of all industrial countries, including the dollar, and the removal of the U.S. import surcharge. The differences between the positions of the industrial countries meant that when the Finance Ministers and Central Bank Governors of the Group of Ten met on September 15 and 16 very little could be agreed except generalities. The Ministers and Governors agreed only that a very substantial adjustment was required to redress the position of the United States, with corresponding adjustments in the positions of other countries; that a large part of this adjustment would have to come about by selective currency realignment; and that “fair world trading arrangements and [military] burden-sharing” would have to be considered. Differences in view continued on the key issues: exchange rates, the approximate magnitude of the necessary improvement to be achieved in the U.S. position, and the timing of the removal of the U.S. import surcharge. It was evident that multilateral negotiations of a major and complex nature lay ahead.

In the course of the London meeting, Mr. Schweitzer put forward a list of the substantive problems requiring discussion, including fundamental monetary reform, and expressed his concern about the continuation of the disarray in exchange rates. He stressed to the Ministers and Governors, as he had to the Executive Directors, his view that the pattern of exchange rates which was emerging did not provide a satisfactory basis for a more permanent pattern. He pointed out that many countries had already made contributions toward the needed currency realignment, noting that the currencies of Canada, the Federal Republic of Germany, and the Netherlands had floated upward vis-à-vis the dollar even before August 15 and that the currencies of Belgium, Italy, Japan, Sweden, and the United Kingdom had been floating upward since that date. So far, there had been no contribution from the United States, and he considered it unlikely that a solution could be found to the realignment problem if one major country refused to accept its share of adjustment. After an adequate move by the United States, the remainder of the realignment would have to be brought about by changes in the rates of the other currencies.

The Finance Ministers and Central Bank Governors of the Group of Ten met again, less than two weeks later, in Washington, on September 26, 1971, the day before the opening of the Annual Meeting, but again no agreement was reached. What talks about trade might take place, whether the United States would remove the surcharge before new parities were negotiated, and what new parities would be agreed were issues that were still being hotly debated. European officials were pressing hard for new parities. The monetary authorities of France, in particular, were insisting on a change in the dollar price of gold. That the United States had a different view was evident in the remarks of Mr. Connally (United States) at a press conference after the Group of Ten meeting on September 26. In accordance with the established procedures of that Group for rotating the chairmanship, Mr. Connally had just succeeded Mr. Benson as chairman for the coming year. He characterized “the gold question” as primarily “a political problem, not an economic one,” and rather than a “premature decision regarding parities,” he proposed a “general clean float” of major exchange rates (clean referring to the absence of official intervention in exchange markets).

1971 Annual Meeting

The Governors assembled in Washington for their Twenty-Sixth Annual Meeting, held from September 27 to October 1, 1971, amid talk of a “collision course” and of the possibility of a “trade war.”

Mr. Schweitzer, in his opening address, repeated his views about the urgent need for a collaborative international approach to the situation and the need for currency realignment, including a change in the rate for the dollar. Real dangers, he stressed again, were inherent in any prolongation of the present impasse, with the possibility of serious disarray in international monetary and trade affairs and an abandonment of the rules of law providing for just and orderly international economic relations. While many had reservations about the precise content of the existing rules, there was universal acceptance of the need for agreed rules for the conduct of international economic intercourse. The Fund itself was an expression of that need. Mr. Schweitzer went on to note that some multiple currency practices had been adopted, but exchange restrictions had so far been avoided. He believed, however, that the longer the necessary international action was delayed, the greater was the prospect of serious disorder and discrimination in currency and trade relationships.

He called upon all countries to cooperate with the United States in improving its balance of payments position, and stated his conviction that the current situation afforded a unique opportunity to strengthen the international monetary system. Some issues might be handled more urgently than others, and of first priority was the “establishment for the major currencies of an appropriate new structure of parities or official exchange rates, together with the abolition of the temporary import surcharge imposed by the United States.”

Regarding currency realignment, he thought that it would be desirable “if all the major countries involved were to make a contribution to the realignment of currencies, not only for reasons of equity, but also for achievement of an appropriate relationship of currencies to gold and, what is perhaps more important, to SDRs and reserve positions in the Fund.” Mr. Schweitzer was concerned, among other things, that the SDR should not depreciate with the dollar, that is, that its value in terms of gold should be maintained.4

Conflicting Views Persist

The speeches of the Governors revealed little if any change in the divergent positions of the eec countries on the one hand and the United States on the other hand. The authorities of the eec countries believed, as Mr. Ferrari-Aggradi (Italy) said, that it was politically important for the success of the negotiations that all countries take part in any currency realignment. Mr. Giscard d’Estaing (France), Mr. Nelissen (Netherlands), and Baron Snoy et d’Oppuers (Belgium) joined Mr. Ferrari-Aggradi in calling for a change in the par value of the U.S. dollar.5 Many pressed for the removal of the U.S. surcharge as a prelude to negotiations.

Mr. Connally (United States) explained that the United States fully appreciated the concerns expressed by other countries. The officials of some countries, he realized, considered the turnaround in the U.S. payments position sought by the U.S. officials to be too large and too rapid. Some thought that a quick, albeit partial, solution ought to be accepted, lest restrictions and even retaliation begin and economic recession set in. Some thought that the quick and partial solution must entail a change in the official dollar price of gold. Some wanted the surcharge taken off before exchange rates were readjusted. He emphasized too that the U.S. authorities fully understood that the surcharge, while applied in a nondiscriminatory way, affected products and countries unevenly, and they were conscious of the political sensitivities of decisions on exchange rates.

Mr. Connally elaborated on the position of the U.S. authorities regarding the immediate future. Exchange markets should operate freely for a transitional period as a way to determine the size and distribution of the needed exchange rate realignment. In order that exchange rates should reflect market realities, other governments should, in the coming weeks, dismantle specific barriers to trade and not influence floating exchange rates by market intervention or by exchange controls. Then, the United States would be prepared to remove the surcharge.6

Governors’ Resolution

Early in September Mr. Lieftinck had suggested to the Executive Board that it present to the Board of Governors a resolution, or a set of resolutions, for consideration and adoption during the Annual Meeting. He thought that a Governors’ resolution could aim at giving “a proper role” to the Fund and additional authority to the Executive Directors. The Board of Governors could, for example, urge the governments of members with a fundamental disequilibrium to realign the exchange rates of their currencies. The Governors could strengthen the position of the Executive Board by explicitly asking it to take whatever measures might be necessary to continue the Fund’s operations under the prevailing circumstances, to submit proposals for greater flexibility of exchange rates, and to study monetary reform for the longer run. A few Executive Directors had responded positively to Mr. Lieftinck’s suggestion. Several of them, however, believing that there was inadequate time in which to agree on a draft resolution or that the meetings of the Group of Ten that were to take place before the Annual Meeting would obviate the need for a Governors’ resolution, had not been favorably disposed to the idea. There had also been a reluctance on the part of the U.S. authorities to have the Fund take any such action in connection with monetary reform as would be stated in a Governors’ resolution.

After the ministerial meeting of the Group of Ten failed to produce results, Mr. Schweitzer, on the weekend before the Annual Meeting, circulated to the Executive Directors a proposed draft resolution for presentation to the Board of Governors. The Executive Directors, in unusual sessions of the Executive Board during the week of the Annual Meeting, considered the draft resolution on Monday and Tuesday afternoons, September 27 and 28. Most of them supported the Managing Director’s attempt at a Governors’ resolution. But precise language proved elusive and controversial. Mr. Dale submitted a draft which avoided any implication that the difficult monetary situation had been brought about by actions of the U.S. monetary authorities and in which there was no reference to the possibility that currency convertibility might be restored once exchange rate realignment was effected. The Executive Board agreed on a revised draft resolution, which was adopted by the Board of Governors on Friday, October 1, 1971, the last day of the Annual Meeting.7

The resolution pointed out the dangers of instability and disorder in currency and trade relationships in the situation then existing, and emphasized the need to avoid these dangers and to assure continuance of the progress that had been made in national and international well-being in the previous quarter of a century. It further stressed that, in the interest of all of the Fund’s members, the orderly conduct of the operations of the Fund should be resumed as promptly as possible. To achieve these objectives, the resolution called upon members to collaborate with the Fund and with each other to bring about a reversal of the tendency to maintain and extend restrictive trade and exchange practices, and to establish, as promptly as possible, a satisfactory structure of exchange rates, maintained within appropriate margins, for their currencies, together with the reduction of restrictive trade and exchange practices.

The resolution was also designed to ensure the Fund’s role in the forthcoming discussions on monetary reform. The Executive Directors were requested to make reports to the Governors without delay on the measures necessary or desirable for the improvement or reform of the international monetary system. For this purpose, the Executive Directors were specifically requested to study all aspects of the international monetary system, including the role of reserve currencies, gold, and SDRs, convertibility, the provisions of the Articles with respect to exchange rates, and the problems caused by destabilizing capital movements. They were further requested, when reporting, to include if possible the texts of any amendments to the Articles of Agreement which they considered necessary to give effect to their recommendations.

After the 1971 Annual Meeting

During the months of October and November there were discussions in many forums. Officials of the U.S. Treasury went to Canada, to Europe, and to Japan to discuss specific actions on trade and defense. Mr. Schweitzer held informal conversations with U.S. monetary officials and traveled to Europe to talk with monetary officials there. The Executive Directors resumed their discussions of the magnitude of the change needed in the U.S. balance of payments and, in line with the Governors’ resolution, undertook to examine measures to continue the Fund’s operations and to improve the monetary system.

With regard to the first of these topics—the change necessary in the U.S. balance of payments—the calculations of the staff of the Research Department had put the size of the correction in the current account of the U.S. balance of payments and of corresponding changes in the payments positions of other countries that ought to be effected by exchange rate adjustments at $8 billion. This figure was considerably lower than the $13 billion estimated by the U.S. monetary authorities, and, although there were differences in the bases of the two calculations, they were concerned that the estimate of $8 billion, together with the estimated depreciation of the dollar against other currencies of 10 per cent, would hamper them in negotiating measures that they considered essential for a sufficiently large improvement in the U.S. balance of payments. When the Executive Directors considered the debated figures in detail, including differences in the technical methodology underlying the estimates, Mr. Dale reiterated the U.S. view that the figure of $13 billion was an essential and conservative one and not “a negotiating one.” In addition, Mr. Viénot had difficulty in accepting the staff’s target for France’s current account.

The size of the improvement needed in the U.S. balance of payments was also discussed by the Deputies of the Group of Ten at a meeting in Paris on October 19 and 20, immediately after Working Party 3 of the oecd had considered this question. Reporting on the latter meeting, the Economic Counsellor said that the results of the calculations of the staff of the oecd were not far from those of the Fund staff in regard to the main components, such as the size of the change in the U.S. current account (the oecd staff had estimated a change of the magnitude of $8 billion or $8.5 billion), and the matching swings for other areas, such as the eec countries and Japan. The positions presented by individual countries, however, were far from consistent. For example, while the United States indicated that it needed a swing of $13 billion, the net amount of the swings offered by all other countries amounted to only $2–3 billion.

Discussions on Resuming the Fund’s Operations

As mentioned above, in October and November the Executive Directors also discussed measures to resolve the practical difficulties that the Fund faced in carrying out its financial operations and transactions. Since August 15 operations had been based on the provisional valuation of the Fund’s assets in U.S. dollars at the old par value for the dollar and a turnstile technique under which repurchases were accommodated to the extent that drawings were made on the Fund. The need for a better method became more urgent as hopes for a quick realignment of exchange rates began to fade. The questions that needed answers fell into two categories: (1) the exchange rates at which the Fund would hold, and conduct transactions in, currencies, gold, and SDRs; and (2) the currencies to be used in drawings and repurchases and similar operations and arrangements for conversion.

When the Executive Directors considered these questions at the end of October, it quickly became apparent that much more was involved than the technical questions affecting the Fund’s operations. Any decision that the Fund might take carried with it implications about the price of gold (and hence the exchange rate of the dollar), implications as to whether the price of gold was to be defined in terms of dollars or in some other way, and implications about the role of gold in future monetary arrangements. In effect, the Fund could be breaking new ground with respect to the price of gold, and, as Mr. Dale reiterated, the U.S. authorities had firm views about any change in the price of gold. Mr. Schleiminger argued that it would be inadvisable to make any radical changes in the Fund’s procedures, and suggested that the interim arrangements that the staff had been using should be continued until currency realignment could be achieved.8 He was supported by Messrs. Mitchell, Palamenghi-Crispi, Suzuki, and Viénot, and by several of the Executive Directors or Alternate Executive Directors for developing members, notably Mr. Arriazu, Mr. Guillermo González (Costa Rica), Mr. Kafka, and Mr. Prasad. Mr. Arriazu explained that access to the Fund’s resources was frequently crucial for developing countries and that any basic changes in procedures should first be thoroughly examined and discussed. Therefore, further discussion about normalizing the Fund’s operations was temporarily suspended.

Discussions on Prospects for Dollar Convertibility

When the Executive Directors turned to measures for improving or reforming the monetary system, their discussions indicated that some interim arrangements might have to prevail in the period after exchange rates had been realigned but before proposals for fundamental reforms, such as reliance on an international reserve asset and the elimination of reserve currencies, could be considered. Since officials of many members were particularly interested in the early resumption of convertibility of the U.S. dollar, much attention centered on the future position of the dollar in the monetary system and on what arrangements for convertibility might apply in any interim period. At the meeting of the Deputies of the Group of Ten on October 19 and 20, the U.S. representative had made it clear that, given the unfavorable indications with respect to the adjustment in payments balances that other countries were willing to make, it would be unwise for the United States to undertake convertibility commitments which it might not be able to keep. He had suggested, therefore, that the question of convertibility was one for long-term reform.

In October and November the Executive Directors considered the subject of dollar convertibility. For their discussion the Economic Counsellor set forth two phases of limited convertibility that might be introduced in the period after currency realignment had occurred and before some ultimate phase when long-term reform had been achieved. Phase A would be a regime of very limited convertibility of the dollar, which would start immediately upon realignment but before conditions had been met, or arrangements made, for the type of convertibility that would prevail in Phase B. The view of the General Counsel, who was concerned that the violation by the United States of the convertibility provisions of the Articles of Agreement might go on for an unduly long time, was that some such arrangement as the enlargement of the General Arrangements to Borrow might be used to permit the United States to convert dollars during Phase A. However, the prospects for any degree of convertibility of the dollar depended entirely on developments in the U.S. balance of payments and reserves, and when the Executive Directors discussed these phases of limited convertibility, Mr. Dale emphasized the reluctance of the U.S. authorities to undertake obligations that might prove hopelessly unrealistic. They believed that a return to a strong U.S. balance of payments position depended on actions to be taken by other countries, and international discussions concerning those actions and even about the size of the adjustment problem had not given them “confidence to leap into assuming obligations to pay out reserves.” Mr. Viénot, too, had a number of doubts about the desirability of the system envisaged by the staff with respect to the future convertibility of the dollar. That system was one, he said, in which the U.S. dollar continued to have “a privileged position,” since other countries would have to intervene in their own markets to support the dollar while the United States would not have a legal obligation to maintain a stable exchange rate.

As the Executive Directors’ discussion continued, it became evident (1) that the U.S. authorities were determined not to undertake commitments to convert dollars or to defend a given exchange rate until the U.S. balance of payments position was substantially improved, or, at a minimum, that mutual measures for an adequate improvement had been agreed; (2) that discussions concerning future convertibility really involved basic decisions as to what part the U.S. dollar would play as a reserve currency and as an intervention currency in a reformed monetary system; and (3) that, because of these two factors, inconvertibility of the dollar into gold or SDRs would continue to exist even after exchange rates were realigned, and might exist for a long period.

Group of Ten Meets Again

By the middle of November, prospects for agreement on currency realignment among the countries of the Group of Ten were brighter. The U.S. authorities had worked out arrangements for trade with Canada and with Japan that they considered satisfactory. Moreover, as Mr. Schweitzer had emphasized to the U.S. authorities, other countries of the Group of Ten (that is, all except the United States) favored a change in the dollar price of gold at least partly to enhance SDRs as an international reserve asset. In addition, the countries that were not in the Group of Ten were becoming increasingly restless about the prolongation of the existing situation, and the UN General Assembly had passed a resolution calling for some action to ease the international monetary situation.

It now appeared that the U.S. authorities were more inclined toward participation in a currency realignment that included a devaluation of the dollar, even though they regarded the realignment likely to be attained as inadequate. In return, European authorities would take some measures regarding trade, and the nine other countries composing the Group of Ten would make a credible commitment on sharing the military burden. There was also what amounted to another condition to the U.S. willingness to devalue the dollar: convertibility of the dollar would not be re-established at this time but would await improvement of the world payments situation following the new measures agreed upon and discussions regarding reform of the monetary system.

On November 30 and December 1, the Group of Ten met again at the ministerial level under the chairmanship of Mr. Connally, this time in Rome. Unusually frank negotiations were carried on in executive session: specific percentages and figures for the exchange rates of the currencies of the ten countries involved were discussed. The negotiations also focused for a long time on trade matters, specifically the agricultural problems of the eec, and the eec countries twice went into caucus to discuss these problems among themselves. That progress had been made was apparent from the remarks of Mr. Connally to the press after the meeting: “We did not reach a decision; we did not solve the problem, but we most certainly did discuss the various elements of that problem.”

Another ministerial meeting of the Group of Ten was planned for December 17 and 18, in Washington.

On December 14, President Nixon flew to the Azores for a meeting with President Pompidou of France. The two heads of state agreed on devaluation of the dollar and, in the words of the communiqué issued after their meeting, on the “contribution that vigorous implementation by the United States of measures to restore domestic wage-price stability and productivity would make toward international equilibrium and the defense of the new dollar exchange rate.” This renewed public recognition by the United States of the need to restore internal cost and price stability helped further to pave the way for agreement on a realignment of exchange rates.

Developing Countries Present Their Views

The nine Executive Directors for the developing members of the Fund—Messrs. Nazih Deif (Egypt), Peh Yuan Hsu (Republic of China), Kafka, Kharmawan, Massad, Omwony, Prasad, Luis Ugueto (Venezuela), and Yaméogo—had, as we have seen in earlier chapters, been meeting regularly as a “G-9 Caucus,” or Group of Nine. During the latter part of 1971 this group repeatedly pressed Mr. Schweitzer to set up a procedure by which officials of the developing countries, in one way or another, could formally express their views—not only on the longer-run issues of reform but also on the immediate question of currency realignment. Currency realignment might necessitate changes in their par values, and most certainly would affect their exchange rates. The issue of convertibility of the dollar, moreover, was of great importance to the developing members because it was linked with the normalization of the Fund’s operations.

When it appeared, late in November, that the countries of the Group of Ten were coming close to agreement on currency realignment, the Executive Directors for the developing members wrote formally to Mr. Schweitzer insisting that some broader meeting than that of the Executive Board be called. Therefore, a fifth joint meeting of Executive Directors and the Deputies of the Group of Ten (the previous four were held between November 1966 and June 1967 and were described in Part One above) was held in Washington on December 16, 1971, the day before the Group of Ten was to meet at the ministerial level. The meeting was attended also by representatives of the Swiss National Bank, the oecd, the bis, and the eec.

At this fifth joint meeting, the Executive Directors for developing members set forth those members’ aspirations regarding any agreement the industrial nations might work out among themselves. They urged that the size and structure of any exchange rate realignment be such as to permit an expansion of world trade and avoid adverse effects on the international flow of capital. They urged further that all restrictions on international transactions that had been imposed because of the latest crisis be removed without delay. With regard to a change in the dollar price of gold, they drew attention to the adverse effects which this could have on the reserve situation of the countries in question, particularly if it led to a reduction in the amount of SDRs allocated. These effects might be expected because of the relatively low share of developing countries in world gold reserves and their relatively higher share in the allocation of SDRs, and because a substantial proportion of the indebtedness of these countries, such as their indebtedness to the Fund, was expressed in terms of gold. They also urged that the Fund be the forum of discussion for reform of the international system.

Smithsonian Agreement

Four months of negotiations came to fruition on December 17 and 18, 1971, when the Finance Ministers and Central Bank Governors of the Group of Ten, under the chairmanship of Mr. Connally, met in Washington in the Commons Room of the Smithsonian Institution’s Old Red Castle. Mr. Schweitzer took part in the meeting and, among other things, reported the views of the Executive Directors for the countries that were not in the Group of Ten.

Almost the whole of the meeting took place in executive session, as the Ministers and Governors reached agreement on a pattern of exchange rate relationships among their currencies.

The United States agreed “to propose to Congress a suitable means for devaluing the dollar in terms of gold to $38.00 an ounce as soon as the related set of short-term measures [relating to trade arrangements] is available for Congressional scrutiny. Upon passage of required legislative authority in this framework, the United States will propose the corresponding new par value of the dollar to the International Monetary Fund.”9 In other words, the U.S. Administration committed itself to seek—following negotiations on certain short-term issues relating to trade arrangements—legislative approval of a 7.89 per cent devaluation of the dollar against gold. It was understood that formal action establishing a new par value for the U.S. dollar would take some time.

Despite the delay in establishing a new par value for the U.S. dollar, the changes agreed in the rates for other currencies were to become effective in the markets at once. In return, the United States agreed to suppress the U.S. import surcharge immediately. Each Minister was to announce the exchange rate for the currency of his country in the way he saw fit. The Fund would inform its member countries of all the new exchange rates.

The United Kingdom and France agreed not to change their par values in terms of gold, which would thus represent a revaluation against the new par value for the dollar of 8.57 per cent. The effective parity relationship between sterling and the dollar was to become £1 = US$2.60571. The effective parity relationship between the French franc and the dollar in France’s official exchange market, previously F 5.55419 = US$1, was to become F 5.11570 = US$1.

The other countries, with the exception of Canada, agreed to establish central rates for their currencies for the time being. A central rate was one that could be communicated to the Fund by any member that did not maintain rates for spot exchange transactions based on a par value, but declared its intention to maintain rates for these transactions within maximum margins from a central rate communicated to the Fund.10

The central rate communicated by Japan, ¥ 308.00 = US$1, meant a revaluation of the yen in terms of gold of 7.66 per cent, and therefore a revaluation of the yen in terms of the dollar of 16.88 per cent. The central rate communicated by the Federal Republic of Germany, DM 3.225 = US$1, was a revaluation of the deutsche mark in terms of gold of 4.61 per cent and of the deutsche mark in terms of the dollar of 13.58 per cent. The central rates communicated for the Belgian franc and the Netherlands guilder represented a revaluation in terms of gold of 2.76 per cent and in terms of the dollar of 11.57 per cent. The central rates communicated for the Italian lira and the Swedish krona represented slight devaluations in terms of gold—1.00 per cent; in terms of the dollar, therefore, the lira was revalued by 7.48 per cent and the Swedish krona by 7.49 per cent.

All these new relationships became effective within the week following the Smithsonian agreement. The Canadian dollar continued to float. The agreed exchange rate relationships are summarized in Table 17.

Table 17.Exchange Rate Relationships Resulting from Smithsonian Agreement, December 18, 1971
MemberPercentage Change in Terms of Par ValuePercentage Change in Terms of U.S. DollarExchange Rate ActionEffective Date
Belgium+2.761+11.57central rate2Dec. 21, 1971
Canadafloating rate continued
France+8.57par value maintained
Germany, Federal Republic of+4.61+13.583central rate2Dec. 21, 1971
Italy−1.00+7.48central rate2Dec. 20, 1971
Japan+7.66+16.88central rate2Dec. 20, 1971
Netherlands+2.76+11.573central rate2Dec. 21, 1971
Sweden−1.00+7.49central rate2Dec. 21, 1971
United Kingdom+8.57par value maintained
United States−7.89new par valueMay 8, 1972

A plus sign (+) indicates a revaluation and a minus sign (−) a devaluation.

See Chap. 27 for an explanation of a central rate.

Based on the par value that was in effect prior to May 9, 1971.

A plus sign (+) indicates a revaluation and a minus sign (−) a devaluation.

See Chap. 27 for an explanation of a central rate.

Based on the par value that was in effect prior to May 9, 1971.

In addition to the currency realignment, the Finance Ministers and Central Bank Governors of the Group of Ten agreed as part of the Smithsonian accord that, pending agreement on longer-term monetary reforms, provision should be made for 2¼ per cent margins of exchange rate fluctuation above and below the new parity relationships. The Ministers and Governors further agreed that discussions should be started promptly, particularly in what they called the framework of the Fund, to consider reform of the international monetary system. Explicit attention was to be directed to the appropriate means and division of responsibilities for defending stable exchange rates and for insuring convertibility of currencies; to the proper role of gold, of reserve currencies, and of SDRs in the system; to the appropriate volume of liquidity; to a re-examination of the permissible margins of fluctuation around established parities and other means of achieving exchange rate flexibility; and to measures to deal with volatile capital movements.

At the time it was negotiated, some observers regarded the Smithsonian agreement as a landmark in international monetary diplomacy. The response of many monetary experts, however, was cautious: they were concerned that the partial shoring up of the par value system, without any safeguards, did not provide a lasting solution. The particular exchange rates agreed were in fact to last for less than 14 months. Nonetheless, the agreement had significance in that it represented the first time in international monetary history that the exchange rates of the large industrial nations were negotiated around a conference table.

The impasse that had existed since August 15, 1971 had finally been broken.

But the international monetary system was not again to be the same. Moreover, discussions of international monetary reform would be shifted from the Group of Ten to the ad hoc Committee of Twenty. And talk would become common about the possibility of changes in the “structure of the Fund.”

The breakdown of the par value system eventually caused a number of difficulties with respect to the valuation of currencies, both in terms of gold and in terms of other currencies. These difficulties became pronounced when the rates for several currencies began to float early in 1973. For a discussion of these problems, see Joseph Gold, Floating Currencies, Gold, and SDRs: Some Recent Legal Developments, IMF Pamphlet Series, No. 19 (Washington, 1976).

The reports of the President’s Commission and the Congressional subcommittee were cited in Chap. 25 above, footnotes 3 and 5.

See the following articles in Staff Papers: Paul S. Armington, “A Theory of Demand for Products Distinguished by Place of Production” Vol. 16 (1969), pp. 159–78, “The Geographic Pattern of Trade and the Effects of Price Changes” Vol. 16 (1969), pp. 179–201, and “Adjustment of Trade Balances: Some Experiments with a Model of Trade Among Many Countries,” Vol. 17 (1970), pp. 488–526; and, for a later and fuller description of this model, Jacques R. Artus and Rudolf R. Rhomberg, “A Multilateral Exchange Rate Model,” Vol. 20 (1973), pp. 591–611.

Opening Address by the Managing Director, Summary Proceedings, 1971, pp. 8–15. The quotations are on pp. 12 and 13–14, respectively.

Statements by the Governor of the Fund for Italy and the Governors of the World Bank for France, the Netherlands, and Belgium, Summary Proceedings 1971, pp. 37, 43, 156, and 152.

Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1971, pp. 218–19.

Resolution No. 26–9; Vol. II below, pp. 331–32.

These interim arrangements were described in Chap. 17 above, p. 328.

Par. 5 of Communique of Ministers and Governors of the “Group of Ten” issued on December 18, 1971, International Financial News Survey, Vol. 23 (1971), p. 418.

For further elaboration, see Chap. 27.

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