- International Monetary Fund
- Published Date:
- February 1996
THE INTERNATIONAL MONETARY FUND 1966–1971
The System Under Stress
VOLUME I: Narrative
Margaret Garritsen de Vries
INTERNATIONAL MONETARY FUND
WASHINGTON, D. C.
© 1986 International Monetary Fund
ISBN 0-939934-09-4 (v.I)
ISBN 0-939934-11-6 (set)
De Vries, Margaret Garritsen, 1922–
The International Monetary Fund, 1966–1971: the system under stress. Washington, D.C., International Monetary Fund, 1976.
Sequel to The International Monetary Fund, 1945–1965: twenty years of international monetary cooperation, by J. K. Horsefield and others, published by the Fund in 1969.
CONTENTS: v.I, Narrative, by Margaret Garritsen de Vries.—v.2, Documents, edited by Margaret Garritsen de Vries.
1. International Monetary Fund. 2. International finance. 3. International liquidity. 4. Special drawing rights. 5. Foreign exchange. I. Title.
This history of the International Monetary Fund for the years 1966 through 1971 in two volumes is a sequel to three earlier volumes, which recounted the origins of the Fund and covered the first twenty years of its existence, from 1945 to 1965.
The six years now reviewed were momentous ones in international monetary relationships, and therefore for the Fund. In this period, the first amendment of the Articles of Agreement took place when the Fund was entrusted with authority for creation of a new reserve asset, the special drawing right. There was also a substantially increased use of the Fund’s resources, accompanied by a sizable increase in members’ quotas and by important changes in the Fund’s policies governing the use of its financial resources. In addition, the Fund endeavored to serve an enlarged membership better by undertaking a number of new responsibilities and activities, primarily in the fields of technical assistance and training.
Outstanding as were the foregoing developments, however, it was the emergence of severe crises concerning gold and exchange rates from 1967/68 onward that catapulted international monetary events to the forefront of world attention and presented problems and challenges to the world’s economic and financial authorities that were the most difficult since the inception of the Fund.
The Fund’s role in all these events is described in Volume I, Narrative. Volume II reproduces the most important documents published by the Fund from 1966 until the end of 1971 and makes available for the first time seven draft outlines for reserve-creating schemes that were prepared in the Fund as part of the process by which special drawing rights were established.
With the advent of the SDR, the period reviewed may in some respects be seen as a special high point in the Fund’s history. The period was, however, also marked by a series of monetary crises that culminated in the collapse of the Bretton Woods system, as described in the closing chapters of Volume I. Subsequently, there were discussions and actions pertinent to reforming the monetary system which are, indeed, still going on. Many of the problems for which solutions have been sought in the years after 1971 thus originated in the period described here. Hence, in publishing these volumes, the Fund hopes to promote understanding of its present, as well as of its past, work.
This history has been written by Margaret Garritsen de Vries, an economist and the Fund’s Historian, a staff member who has been associated with the Fund since 1946. She has had full access to the Fund’s records and has benefited from comments on the manuscript from her staff colleagues and members of the Executive Board, in both their personal and their official capacities. In these respects, these volumes are, as Pierre-Paul Schweitzer stated in his Foreword to the earlier volumes, “history written from the inside.” At the same time, they are the personal responsibility of the author, and no statement or opinion expressed should be understood as committing the Fund in any way.
H. Johannes Witteveen
International Monetary Fund
Pierre-Paul Schweitzer, Chairman of Executive Board and Managing Director
Meeting of 1966–68 Executive Board
Museum of Modern Art, Rio de Janeiro, Site of 1967 Annual Meeting
President Lyndon B. Johnson, Pierre-Paul Schweitzer, Managing Director, and Henry H. Fowler, Governor for United States
Meeting of 1968–70 Executive Board
Meeting of 1970–72 Executive Board
Joint Session of Boards of Governors of Fund and World Bank at an Annual Meeting
Frank A. Southard, Jr., Deputy Managing Director
Headquarters, Washington, 1973
Preface to Volume I
The history of the Fund for the six years 1966 through 1971 differs in many ways from that of the Fund’s first twenty years. Innovative changes were introduced into the original design of the Bretton Woods system. Yet, notwithstanding these changes, such severe stress developed in that system as to cause its eventual collapse. Several of the monetary and financial questions discussed in the Fund in the period reviewed here were new to the international scene and involved highly technical matters with widespread implications for the monetary system. These questions engaged the interest of economists and monetary specialists to an extent that had not occurred since the discussions attending the birth of the Fund in 1944.
Moreover, in the second half of the 1960s, the Fund’s activities and decisions became increasingly interwoven with discussions in and decisions by other forums, most notably the Group of Ten but also the European Economic Community and groups formed by developing countries. Also, to an extent greater than in the preceding twenty years, in the six years reviewed here events taking place in the Fund were directly and quickly influenced by economic and monetary developments taking place in the world as a whole and in individual member countries, especially as one monetary crisis after another erupted. Literally, the events of yesterday bore heavily on today’s discussions and decisions. This situation was quite unlike that of the Bretton Woods discussions, in which the circumstances of war were, in a sense, ignored while the participants planned for a world yet to come into being after World War II. Furthermore, the questions involved in 1966–71 were of such consequence as to concern officials at the very highest political levels; and the circumstances were conducive to the public expression of views on these questions while negotiations had not yet been completed.
These factors have necessarily influenced my writing. I have organized this history around what I see as the four main areas in which the Fund’s further evolution as an international monetary organization took place: the establishment of special drawing rights (SDRs); the unprecedented recourse by members to the financial resources of the Fund and important changes in policies affecting the use of those resources; the emergence of severe disturbances in gold and exchange markets that brought to an end the international monetary system created at Bretton Woods; and, with the growth of membership, the gradual assumption by the Fund of new responsibilities and activities. In my descriptions, I have tried especially to bring out the major issues that were involved insofar as the Fund was concerned and the reasoning that underlay the Fund’s actions and decisions. As in the volumes relating the Fund’s history for earlier years, the primary focus is on the Executive Board and the principal source of information has been the minutes of the Executive Board’s meetings and informal sessions. However, to a considerably greater extent than was done in the earlier volumes, I have included material describing the staff’s analyses, the considerations behind several of the decisions of the Managing Director, the nature of economic and monetary developments influencing negotiations, and related discussions and decisions taking place outside the Fund. This material has all been based on the Fund’s documents and records.
My aim has been to describe the Fund’s actions objectively. Since this is a history of events that are relatively near in time, there are instances, particularly in the final chapters, where I have regarded my task as mainly reportorial, and where I have refrained from analysis or interpretation.
Finally, some material has been included so that this history of the Fund for the years 1966–71 may be fairly self-contained, that is, so that readers do not necessarily have to have read the history of the Fund for earlier years.
A few techniques for identifying officials in a relatively simple way have been adopted. Those appointed by member countries as Governors of the Fund and of the World Bank have been referred to in these capacities, especially when they attended Annual Meetings, rather than in their capacities as officials of their home countries, usually Ministers of Finance or Governors of central banks. The Managing Director, who is also the Chairman of the Executive Board, is referred to as the Managing Director, thus avoiding the need to distinguish in which capacity he may have been acting at the time. The full name of an Executive Director and, as an approximation to the identification of his constituency, his country of nationality are given the first time he is mentioned; his country of nationality is repeated the first time he is mentioned in each of the subsequent parts into which the volume is divided. A similar course has been followed for Alternate Executive Directors, each of whom is also linked, on the first occasion he is mentioned, to the Executive Director who appointed him. Thereafter surnames only are used. The first mention of an Executive Director or of an Alternate Executive Director may come in a series of names and, consequently, there is at times a mixture of given names and surnames, especially in the later parts of the volume. The procedure may, therefore, be confusing for those reading only certain parts, but any alternative seemed to be even more complicated and repetitive of given names.
There is another point concerning the members of the Executive Board to which the reader should be alerted. During the period reviewed here, changes were made in appointed Executive Directors and, following the customary biennial elections of Executive Directors, newly elected Directors took office on November 1 of 1966, 1968, and 1970. For ease of exposition, changes in Executive Directors have not been spelled out in Parts One through Five. A brief description of the changes in the composition of the Executive Board from 1966 through 1971 is given in Part Six (Chapter 30). A complete listing of the Executive Directors and their Alternates and of the countries appointing or electing them and the years in which they served is given in Appendix A–1, Appendix A–2, and Appendix A–3.
The names of some member countries were changed in the period reviewed here. However, the names in effect on December 31, 1971 have been used throughout the volume.
I am very much indebted to numerous colleagues both on the staff and on the Executive Board for their many comments. Unfortunately, I cannot mention all of their names here. I have especially warm feelings for several who have been exceptionally close to this history of the Fund. Frank A. Southard, Jr., Deputy Managing Director from November 1, 1962 until March 1, 1974, made several suggestions and read most of the manuscript; his extensive personal files and notes of meetings at which he presided or in which he took part provided me with much essential information and with background for understanding the formal documents. Joseph Gold, the General Counsel, and J. J. Polak, the Economic Counsellor, have answered queries, provided explanations and interpretations, and read and commented on draft copy, thereby enabling me to make more accurate and more complete than would otherwise have been possible descriptions of many events in which they participated. Fred Hirsch’s comments on an early draft of the chapters on SDRs prompted me to make extensive revisions. J. Keith Horsefield, responsible for the history of the Fund for 1945 to 1965, read this sequel and made many suggestions. Philine Lachman read the manuscript with a lawyer’s eye.
Marie C. Stark, Archivist, and her assistant, Milton K. Chamberlain, sorted out the materials that I needed from among the Fund’s voluminous records and documents; their intimate familiarity with these records and documents made my hours of research most fruitful. Martin L. Loftus and Charles O. Olsen, then Librarian and Assistant Librarian, respectively, of the Joint Bank-Fund Library, and their staff helped me to keep abreast of related current literature.
Helen G. (Becky) Burrows was my assistant throughout most of the project, typing drafts, preparing statistical tables and Appendices, and making editorial suggestions; in all these capacities she was invaluable. Faye L. Olin performed secretarial and editorial duties in the later stages of the project.
Jane B. Evensen, Editor, assisted by Jennie Lee Carter, painstakingly edited the final manuscript and saw the volumes through to publication. Surinder Nath worked on the index. The Graphics Section helped in several ways with the production process; Joseph J. Diana assisted with photographs, and Toshiko Habir designed the dust jacket.
Needless to say, any shortcomings, errors, or blemishes that remain are my responsibility.
M. G. de V.
Chronology of Principal Events, 1966–711
|February 23||A general increase in Fund quotas of 25 per cent, together with special increases for 16 countries, became effective, which would, when all members had consented to their increases, expand the Fund’s resources from $16 billion to $21 billion.|
|June 3||The Executive Board concurred in a proposal by India to change the par value of the rupee from 21 U.S. cents per rupee to 13.3333 U.S. cents per rupee, to be effective on June 5 (Washington time).|
|September 20||The Executive Board took a decision extending and liberalizing the compensatory financing facility.|
|July 7||The Executive Board concurred in a proposal by Ghana to change the par value of the new cedi from 140 U.S. cents per new cedi to 98 U.S. cents per new cedi, to be effective on July 8.|
|September 29||The Board of Governors approved the “Outline of a Facility Based on Special Drawing Rights in the Fund,” and asked that the Executive Directors proceed with work on drafting amendments to the Articles of Agreement.|
|September 29||The Board of Governors adopted a resolution asking for a study by the Fund and the World Bank of the problem of stabilization of the prices of primary products.|
|October 11||The Executive Board concurred in a proposal by Finland to change the par value of the markka from 31.25 U.S. cents per markka to 23.8097 U.S. cents per markka, to be effective on October 12.|
|November 18||The Executive Board concurred in a proposal by the United Kingdom to change the par value of the pound sterling from $2.80 to $2.40 per pound sterling, effective that same date.|
|November 18–27||The Executive Board concurred in proposals by Ireland, Israel, Cyprus, Guyana, Malawi, New Zealand, Spain, Ceylon, Denmark, Jamaica, Sierra Leone, Trinidad and Tobago, and Iceland to change their par values, and in a proposal by The Gambia to change its exchange rate.|
|November 29||The Executive Board approved a stand-by arrangement for the United Kingdom for $1.4 billion.|
|March 16–17||The central banks of seven countries agreed to buy and sell gold at the official price of $35 an ounce only in transactions with monetary authorities, and a two-tier market for gold emerged.|
|April 16||The Executive Board completed its work on the proposed amendments to the Articles of Agreement establishing an SDR facility in the Fund and making certain changes in the Fund’s rules and practices; the amendments were to be transmitted to the Board of Governors for consideration and approval.|
|May 31||The Board of Governors approved the proposed amendments to the Articles of Agreement, which were then submitted to members for acceptance.|
|June 4||The French franc had come under pressure and France made a gold tranche purchase of $745 million from the Fund.|
|June 19||The United Kingdom drew the $1.4 billion authorized under its stand-by arrangement.|
|September 20||The Executive Board, having reviewed the Fund’s policy on the use of its resources under stand-by arrangements, adopted guidelines to ensure uniform and equitable treatment for all members.|
|November 11||The Executive Board concurred in a proposal by Iceland to change the par value of the króna from 1.75439 U.S. cents per króna to 1.13636 U.S. cents per króna, to be effective on November 12.|
|November 20–22||After a new exchange crisis had forced the closing of markets in France, the Federal Republic of Germany, the United Kingdom, and other countries, the Group of Ten met at the ministerial level in Bonn to discuss the measures to be taken, including, inter alia, possible adjustments in the exchange rates of the deutsche mark and the French franc. (No exchange rate action was agreed upon.)|
|December 31||Drawings from the Fund for the year totaled $3.5 billion, the largest annual amount since the Fund commenced operations in 1947.|
|June 20||The Executive Board approved another stand-by arrangement for the United Kingdom, for $1.0 billion.|
|June 25||The Executive Board approved a facility to finance international buffer stocks of primary products.|
|July 28||The amendments to the Articles of Agreement entered into force.|
|August 6||The Special Drawing Account came into existence.|
|August 10||The Executive Board concurred in a proposal by France to change the par value of the franc from 0.180 gram of gold per franc to 0.160 gram of gold per franc, effective the same day.|
|September 19||The Executive Board approved a stand-by arrangement for France for $985 million, and shortly thereafter France purchased $500 million under the arrangement.|
|September 29||The Federal Republic of Germany informed the Fund that it could not maintain rates for the deutsche mark within prescribed limits around the par value, and thus the rate for the deutsche mark was allowed to float.|
|October 3||The Board of Governors approved the Managing Director’s proposal to allocate SDRs over a first basic period of three years beginning January 1, 1970.|
|October 17||The Executive Board agreed to a second renewal of the General Arrangements to Borrow for five years beginning October 24, 1970.|
|October 24||The Executive Board concurred in a proposal by the Federal Republic of Germany to change the par value of the deutsche mark from 25 U.S. cents per deutsche mark to 27.3224 U.S. cents per deutsche mark, to be effective on October 26. This revaluation ended the floating rate for the deutsche mark.|
|November 7||The Executive Directors continued with the review of the role of exchange rates in the adjustment of international payments that they had begun somewhat earlier in connection with their Annual Report for 1969.|
|December 1–30||The Executive Board took a series of decisions preparatory to putting the Special Drawing Account into operation.|
|December 30||The Executive Board took a decision whereby as a matter of policy the Fund would buy gold from South Africa.|
|December 31||Drawings from the Fund for the year totaled $2.5 billion, the largest so far for any year except 1968.|
|January 1||The first allocation of SDRs was made.|
|February 2||France drew the remaining $485 million authorized under its stand-by arrangement.|
|February 9||The Board of Governors approved increases in quotas under the fifth general review. Fund quotas would be increased from $21.3 billion to $28.9 billion if all members increased their quotas to the maximum proposed.|
|May 31||Canada informed the Fund that it would not maintain the exchange rate of the Canadian dollar within its present margins, and the rate for the Canadian dollar once again was allowed to float.|
|August 9||The Executive Board concurred in a proposal by Turkey to change the par value of the lira from 11.1111 U.S. cents per lira to 6.66667 U.S. cents per lira.|
|August 14||The Executive Board concurred in a proposal by Ecuador to change the par value of the sucre from 5.55556 U.S. cents per sucre to 4.00000 U.S. cents per sucre, to be effective on August 17.|
|September 13||The Executive Board reported to the Board of Governors on the role of exchange rates in the adjustment of international payments.|
|September 25||Closing the Twenty-Fifth Annual Meeting of the Board of Governors, Mr. Hédi Nouira, Chairman, observed that, on the subject of exchange rate flexibility, “there seems to be a consensus in favor of further study by the Fund but against any radical or major changes.”|
|October 26||The Executive Board decided that restrictions resulting in payments arrears were exchange restrictions subject to the Fund’s approval.|
|November 25||The Executive Board took a decision that enabled members to use the buffer stock financing facility in connection with their contributions under the Fourth International Tin Agreement.|
|January 1||The second allocation of SDRs was made.|
|January 23||The Executive Board concurred in a proposal by Yugoslavia to change the par value of the dinar from 8.0000 U.S. cents per dinar to 6.66667 U.S. cents per dinar.|
|May 9–11||To stem capital inflows, the Federal Republic of Germany and the Netherlands allowed the rates for their currencies to float, the Belgo-Luxembourg Exchange Institute enlarged its free market for capital transactions, and Austria revalued its currency.|
|July 16||The first purchases under the buffer stock financing facility were made, by Bolivia and Indonesia. (Malaysia purchased under the facility on August 10.)|
|August 15||The United States informed the Fund that it would no longer freely buy and sell gold for the settlement of international transactions, thus suspending the convertibility of officially held dollars.|
|August 16–28||Members introduced a variety of exchange rate arrangements, with rates for several major currencies allowed to float.|
|October 1||The Board of Governors adopted a resolution calling for study of measures to improve or reform the international monetary system.|
|December 17–18||The Group of Ten decided, as part of the Smithsonian agreement, on a realignment of the currencies of the major industrial countries.|
|December 18||The Executive Board took a decision establishing a temporary regime of central rates and wider margins.|
Includes all changes in par values before August 15, 1971.
THE INTERNATIONAL MONETARY FUND
Volume I: Narrative
“If we consider the international monetary system not only as a structure, hut also, as I believe we must, as the way in which that structure is used, it is quite evident that we do not have the same system now as we had five, let alone ten, years ago.”
—Pierre-Paul Schweitzer, Managing Director, addressing the International Financial Conference in Geneva on May 19, 1970.