Substitution Account for Gold
- International Monetary Fund
- Published Date:
- February 1996
As draft amendments to the Articles of Agreement were being considered by the Executive Directors in 1975, much discussion was devoted to an amendment that would enable the Fund to establish a substitution account in which members could offer their gold holdings to the Fund in exchange for SDRs. The Committee of Twenty, which had also discussed the possibility of a substitution account in the Fund, had recommended that consideration be given to such an amendment. The staff circulated to the Executive Directors two papers that had been prepared in the Research Department, one in April 1975 and one in July 1975, describing possible provisions of a gold substitution account. These staff papers are published as (A) and (B) below. The Executive Director elected by Austria, Belgium, Luxembourg, and Turkey, Jacques de Groote, circulated to the Executive Directors an alternative approach to the gold substitution account. Mr. de Groote’s paper appears as (C) below.
(A) A Substitution Account for Gold
(April 23, 1975)
In response to a request by a number of Executive Directors, this paper presents some suggestions on a possible approach to, and possible provisions for, a substitution account for gold presently held by members. The paper does not deal with the subject of the use of the gold presently held by the Fund.
The approach is designed to achieve four interrelated objectives.
(a) To give members a once-for-all opportunity to convert part or all of their gold holdings into usable, more stable, and interest-earning assets. The once-for-all approach responds to a broadly expressed desire that the Fund should not provide a continuous market, and hence potential indirect price support, for gold.
(b) To bring reserves under more effective international influence by greatly reducing gold holdings in members’ reserves and to avoid an excessively rapid increase in international reserves by distributing over time the effective increase in the value of members’ gold reserves.
(c) To combine these arrangements with allocations of SDRs to members with zero or low gold holdings, in an effort to compensate to a reasonable degree the serious distributional effects on international liquidity arising from the increase in the market price of gold.
(d) To move the gold acquired by the Fund into the market at a gradual pace, thus furthering the reduction of gold in the international monetary system and enabling the Fund, by investing the proceeds, to acquire assets from the interest of which it can pay interest on the SDRs issued against gold.
Possible provisions to achieve these objectives are described in the five points listed below. They are not presented in detailed legal form; the sketch of provisions is intended to facilitate a discussion by Executive Directors as to whether this broad approach merits to be pursued further. No attempt is made to present a full set of variants; many such variants could be considered, for example with respect to the interest provisions.
(1) When the Fund found that members that held a large proportion of the stock of monetary gold were prepared to offer all or a major part of their gold holdings in exchange for SDRs, the Fund would set a date and announce the terms on which it would stand ready to make such exchanges. The Fund’s decision to this effect would presumably be governed by an 85 per cent majority.
(2) The terms set by the Fund would include the following:
(a) The price to be paid by the Fund would be related to, but presumably somewhat lower than, the market price at the time of the decision. The Fund would pay SDR 35 per ounce at once, and the balance in annual installments determined in advance. There could be provision for a member with payments problems to draw down in advance some future installments. The SDRs needed to make the payments on gold would be created by the Fund for this purpose.
(b) Each member exchanging gold for SDRs would provide the SDR mechanism with the corresponding required increase in acceptance of SDRs. Hence its maximum acceptance commitment would be increased by three times the amount of SDRs it had received in exchange for gold.
(c) The member would be subject to a charge on the SDRs received in exchange for gold to the extent necessary to cover any difference between the prevailing rate of interest on SDRs which it would receive and the interest earned by the Fund on the invested proceeds from the amount of gold sold. The need for this charge would arise primarily from the fact that the timing of the sale of gold would presumably lag behind the payments of SDRs under (2)(a). Gold-selling members might also be entitled to share in any excess of the Fund’s interest receipts over its interest costs on the SDRs created in exchange for gold.
(3) When the Fund decided to buy gold under (1) it would also decide to allocate SDRs to all participants over the same period as that of the installments under (2)(a) in such a manner as to avoid a sharp disturbance in the distribution of reserves among major groups of members. Allocations under this provision could be made under a formula that entitled each participant to acquire SDRs, from the sale of gold and allocation combined, up to a stated percentage of its quota.
(4) The reserve increase involved in the annual creation of SDRs under (2)(a) and (3) combined would have to be determined by global liquidity needs, i.e., be in accordance with the principles and considerations of draft Article XXII, Section 1. (This would not apply to the initial payment of SDR 35 per ounce since it would not constitute new reserve creation.)
(5) The Fund would sell the gold acquired under (1) over time and invest the proceeds, e.g., in securities of other international institutions.
Some quantitative illustration of the financial implications of these provisions may be helpful, even if it has to be very rough. The stock of monetary gold in the hands of countries equals about 1 billion ounces. Suppose that the Fund decided to offer members SDR 120 per ounce (about $150 per ounce at current exchange rates), and that all gold was tendered to the Fund.1 This would involve a reserve increase of SDR 85 per ounce, or a total increase of SDR 85 billion.
Assume further that the Fund judged that reserve creation at a rate of SDR 10 billion per year would be appropriate for some period ahead; this would be about 5 per cent of the stock of reserves in the later 1970’s. If one fourth of this amount were set aside for allocations to members with low gold holdings, SDR 7.5 billion would be available for the payment of annual installments on gold. This would mean that the Fund would take about 11 to 12 years (SDR 85 billion at the annual rate of SDR 7.5 billion) to pay the “profit” element of the agreed price for gold. On different assumptions for (i) the price of gold offered to members, (ii) the amount of reserve creation considered appropriate, and (iii) the proportion of SDRs to be created by allocation, the period over which annual installments would be distributed could work out considerably shorter or longer.
(B) Possible Provisions of a Gold Substitution Account
(July 28, 1975)
In the paper, “A Substitution Account for Gold,” the objectives of such an account are described, together with possible provisions to achieve those objectives and a quantitative illustration of the financial implications of the suggested provisions. This paper restates the provisions, with some elaboration and a few technical corrections in their description, and then proceeds to explore the question of what sort of amendments to the Articles would be required to implement such provisions.
As the original paper noted, the provisions set out in the six points listed below by no means attempt to indicate a full range of possible variants that could be consistent with the general approach. For example, any number of conditions applying to investments or to the disposition of net income can readily be envisaged.
(1) When the Fund found that members that held a sufficiently large proportion of the stock of monetary gold were prepared to offer some substantial part of their gold holdings in exchange for SDRs, the Fund would set a date and announce the terms on which it would stand ready to make such exchanges. (As suggested in (A) above, the gold substitution account is proposed to be activated on a single occasion; this “once-for-all approach responds to a broadly expressed desire that the Fund should not provide a continuous market, and hence potential indirect price support, for gold.”) The Fund’s decision to this effect would presumably be governed by an 85 per cent majority.1
(2) The terms set by the Fund would include the following:
(a) The price to be paid for the gold, which would be lower than the market price at the time of the decision. An amount of SDR 35 per ounce would be paid at once, and the balance in annual installments determined in advance. There could be provision for a member with payments problems to draw down in advance some future installments. The SDRs needed to make the payments on gold would be created by the Fund for this purpose. The gold substitution account would be responsible for paying, in SDRs, the charges on the SDRs issued, together with “assessments” to cover the administrative expenses of the Special Drawing Account.
(b) Each member exchanging gold for SDRs would assume an obligation to provide currency in return for SDRs through designation up to a maximum of three times the amount of SDRs it had received in exchange for gold.
(c) There would be a special levy, borne by gold-selling members in proportion to their sales to the account, to the extent necessary to cover any difference between the interest earned on the invested proceeds from the amount of gold sold, and the amounts needed to pay (i) charges and assessments on the SDRs created in payment for gold, at the same rates as those prevailing for net cumulative allocations, and (ii) interest due to members from the gold substitution account on amounts by which installments to participants had been reduced by allocations (see point (3), below). Apart from possible interest rate differentials, the need for this special levy would arise to the extent that the timing of the sale of gold lagged behind the payments of SDRs under (2)(a). (An alternative way could be considered for covering such a difference between the income received and paid by the account, namely, through the creation of additional SDRs in the amount of the difference; the SDRs created for that purpose would be canceled again whenever the income receipts of the account exceeded its payments. In the staff’s opinion, this approach does not recommend itself on the grounds that it sets an undesirable precedent and that it removes the incentive for the sale of gold.)
(d) Gold-selling members would be required to pay in SDRs any special levy under (2)(c) and to convert into SDRs the interest earned on invested proceeds, to the extent that it would accrue in currency. Any member that did not hold sufficient SDRs for these purposes would be obligated and entitled to obtain them in the manner described in (6).
(3) The Fund (Special Drawing Account) could decide to combine with the purchase of gold under (1) an allocation of SDRs to all participants, in order to mitigate a sharp disturbance in the distribution of reserves among major groups of members. The annual installments due to any participant under (2)(a) would be reduced by the amount of that participant’s allocation during the same year,2 but the member would receive interest (in SDRs) from the gold substitution account as if the full installment had been paid to it. (The effect of this provision would be as if participants that were receiving annual installments from the gold substitution account would not—during that period and to that extent—receive allocations of SDRs; the offsetting of payments from the account against SDR allocations is not proposed for the initial payment of SDR 35 per ounce on the ground that this amount, in any event, would not constitute new reserve creation.) The net reserve creation resulting from any allocation (SDR allocations less reductions in installments paid by the gold substitution account) would have to be consistent with the principles of draft Article XII, Section 1.
(4) The gold acquired under (1) would be sold over time and the proceeds would be invested, e.g., in securities of other international institutions.
(5) The gold acquired, the proceeds of sale, and the investments of such proceeds would be held in a new (third) Fund account, the gold substitution account. Participants in this account would be all members that had sold gold to the account for substitution. Decisions on matters relating to the account would be taken by participants, voting in proportion to their gold sales to the account. Participants would share, in proportion to their gold sales to the account, in the net income of the account and, on withdrawal or liquidation, in its capital value.
(6) A member to which SDRs had been issued that ceased to be a participant in the Special Drawing Account or an “other holder” of SDRs would return to the Fund for cancellation the amount of SDRs that had been issued to it, against a pro rata share of the gold and investments held by the gold substitution account. The member would be obligated and entitled to obtain enough SDRs (against convertible currency) to enable it to fulfill this requirement (i) from other participants in the gold substitution account (a) in proportion to the amounts they had received, and (b) if proportional amounts exhausted the holdings of one or more participants, further pro rata amounts up to the total holdings of all participants that had received issues; (ii) from the General Account, in such amount as the Fund might decide; (iii) from all other holders (a) in a manner to be decided by a high majority of the Fund or (b) if decision cannot be reached, in proportion to total holdings of individual members. In case of the liquidation of the Special Drawing Account or of the Fund, this same procedure would be extended to cover all holders to which SDRs had been issued. Any such cancellation of issued SDRs and corresponding return of the assets of the gold substitution account would be deemed to have taken place before any other settlements in connection with withdrawal or liquidation.
Even though the broad provisions suggested above could in practice be implemented in a number of ways, it is nonetheless inherent in their nature that an approach of this kind would not impinge in any way on the rights and obligations that a participant in the Special Drawing Account or other member of the Fund has under the present Articles or will have under the amended Articles.3 This maintenance of the existing status would be assured, because the approach provides for (a) an increase in acceptance obligations pari passu with the creation of SDRs, (b) sources of income sufficient to meet all charges, and (c) withdrawal and liquidation provisions directly related to the gold substitution account. Furthermore, such effects on rights and obligations as might ensue would be felt solely by members participating in the account, and such participation would be at the initiative of the members concerned. It may be possible, therefore, to devise a self-contained section to be incorporated in the Articles by amendment that would permit a gold substitution account to be established and put into operation at some future time, if and when a large majority was in favor of doing so. These provisions would be enabling provisions; they would also establish that the specific terms that might eventually be adopted, whatever these might be, could not adversely affect the pre-existing rights and obligations of any member.
A basic reason why such a procedure would be feasible is that an “issue” of SDRs, i.e., the creation of SDRs for the purpose of paying for gold, can be clearly distinguished from an “allocation.” Existing provisions such as those on charges and reconstitution, for example, would thus not need to be amended, since they refer entirely to net cumulative allocations; since an issue is not the same as an allocation, different provisions can be adopted on such matters in respect to issues of SDRs (such as a stipulation that the gold substitution account rather than the member shall pay the charges) without creating a conflict.
In contrast, despite the fact that two different processes could be used for creating SDRs, all SDRs would be identical in every respect. Therefore, those provisions on SDRs in the present Articles where the method of creation has no bearing, such as most of those dealing with operations and transactions, would be equally applicable to any SDRs that might be issued. No amendment of the provisions of that type in the Articles would thus be necessary.
The following matters would seem to be the ones that would have to be dealt with, as a minimum, in the enabling amendment.
(1) The Fund would have the right, under terms which it would set, to issue SDRs in payment for gold sold to the gold substitution account by members that were participants in the Special Drawing Account or “other holders.”
(2) A recipient of an issue of SDRs in payment for gold would be under the same obligation to provide currency as if it had received an allocation of the same amount. (Although this provision might appear to be one of the terms that could be set by the Fund, it should in fact be included as an amendment. This would guarantee against any possibility that the Fund might fail to set such a term, which could adversely affect the quality of the SDR to the detriment of holders that were not recipients of an issue.)
(3) The gold substitution account would be authorized and required to pay charges and assessments to the Fund on issues of SDRs at the same rates as are paid by participants on net cumulative allocations.
(4) The gold substitution account, under terms set by the Fund, would have the authority to
(a) buy, hold, and sell gold;
(b) invest and reinvest the proceeds of gold sales;
(c) impose a special levy on the members to which SDRs had been issued, to the extent that the account’s earnings from investments were insufficient to cover the charges and assessments payable under (3) above, and the interest payable on any installments that had been reduced by allocations;
(d) pay interest on any installments that had been reduced by allocations;
(e) dispose of its net income.
(5) Gold and the uninvested and invested proceeds of gold sales would not be deemed to be “Fund holdings” for the purpose of calculations or of the maintenance of value in the General Account under the Articles.
(6) There would be separation of the assets and of decision-making and liquidation provisions in accordance with what is stated in (5) and (6) on page 309, and provision for conversion of currencies into SDRs for the payment of charges and assessments on SDRs in accordance with (2)(d).
(C) An Alternative Approach to the Gold Substitution Account Observations of Jacques de Groote (September 26, 1975)
The main purpose of the suggestions advanced in this paper on a personal basis is to initiate further reflection on the question of gold and to consider, in particular, whether or not an enabling clause for a substitution or consolidation scheme should be included in the present amendment exercise. The modalities outlined here for a gold substitution account aim at substantiating the idea that a gold consolidation scheme could be made operative whenever it would benefit of sufficient support; they are, as such, illustrative and open for discussion.
I. Some comments on the gold substitution account
The scheme proposed to date to achieve a “phasing-out” of the role of gold in the international monetary system has three features, which either leave unsolved major problems or create further difficulties. These three features are the following:
1. The proposed scheme advanced by the staff relates to the gold held by member countries in their external reserves, while leaving unresolved the question of the disposition of the Fund’s gold. However, gold held by the Fund is not in essence different from gold held by member countries; any decision taken on either the gold holdings of the Fund or the gold holdings of member countries necessarily affects both. A global approach that would encompass the Fund’s gold as well as member countries’ gold seems therefore preferable to a dual approach.
2. Under the staff’s scheme, the country that sold gold to the substitution account would receive SDRs that would be a kind of hybrid between allocated and earned SDRs. The SDRs received in exchange for gold would be similar to allocated SDRs, for instance, with regard to the acceptance limit, the entitlement to use SDRs to obtain currency through designation and the requirement of need. Initially, these SDRs would also be similar to allocated SDRs, with no net interest income; they might even, for a period of time, be subject to a net charge, namely, the “assessment” under Section 4 of Article XXVI. Ultimately, after the gold has been sold and invested, the SDRs acquired against gold would get the full net income, and the member country that had acquired those SDRs would be in the same position as if it had earned them.
This aspect of the proposed substitution scheme calls for two observations. First, it seems unrealistic to expect central banks to agree to sell gold, thereby triggering unpredictable effects on the gold markets, in order to acquire SDRs on which they might have to pay an assessment charge during an undetermined period of time. Second, if this scheme were nevertheless put into operation, two varieties of SDRs would be in existence simultaneously, which would complicate the operation of the SDR system. If, in the hand of their holder, SDRs created by allocation and SDRs created in substitution for gold would be similar, payment of interest on the latter, which is not part of an altogether self-financed system, would remain an actual or potential burden for their original holder, depending on the profitability of the invested proceeds of gold sales.
3. Sales of gold in the markets by the substitution account are a built-in feature of the staff’s proposal. It follows that the price of gold on the markets would have an impact on the functioning of the substitution account. There seems here to be an intrinsic conflict in a scheme that is under the pledge not to support the price of gold while it remains dependent on transactions on the gold markets.
Indeed, unless uncertainties for member countries are overlooked, unless permanent concern of central banks for the market-depressing effect of gold sales is disregarded, and unless financial risks for the Fund are neglected, the feasibility of the proposed scheme implicitly requires that the operations of the substitution account would be profitable in the long run, which means that they would have to be conducted in such a way as not to disappoint the expectation that the trend in the price of gold would be upward.
II. An alternative approach: The gold consolidation account
A substitution scheme for gold should be designed to achieve the following interrelated objectives:
(i) to establish a mechanism that would ensure a phasing down of the role of gold in the international monetary system while enhancing the role of the SDR, thereby increasing the volume of international liquidity that would be brought under international management;
(ii) to give the Fund as well as members an opportunity to convert part or all existing gold holdings into a usable and more stable asset;
(iii) to associate to a reasonable degree the countries that do not hold a substantial part of their reserves in the form of gold to the increase in international liquidity connected with the increase in the market price of gold; and
(iv) to enable the Fund to utilize the increase in value of its gold holdings to grant financial assistance to the poorest among its member countries, either directly or through other international organizations.
Any substitution scheme would moreover have to eliminate incentives to provide a direct or indirect support for the price of gold and to prevent a strengthening of the role of reserve currencies. In that respect, the suggested consolidation scheme would avoid the increase in the role of reserve currencies that would result from sales of gold on the markets by central banks. Furthermore, it would not exclude and might indeed pave the way for a substitution system for reserve currencies. It must be recognized, however, that there is a substantial difference between gold, which is a primary reserve asset very close in nature to the SDR, and reserve currency balances, a portion of which is being held for the purpose of interventions in the foreign exchange markets to ensure, on a day-to-day basis, sufficient elasticity in the short-term and medium-term adjustment.
B. Possible provisions
Possible provisions to achieve these objectives could be sketched as follows:
1. Gold held by member countries
(i) When the Fund found that members that held a large proportion of the stock of monetary gold were prepared to renounce all or a major part of their gold holdings, and substitute SDRs for gold in their reserves, the Fund would set a date and announce the terms on which it would stand ready to make such substitutions. The Fund’s decision to this effect should presumably be governed by a high majority, for instance 85 per cent.
(ii) The terms set by the Fund would include the following:
The Fund would allocate SDRs to member countries willing to renounce part or all of their gold holdings at a price based on the market price of gold at the time of the decision. These member countries would be entitled to a total allocation of SDRs corresponding to the amount of gold it had delivered. The Fund would allocate SDR 35 per ounce at once, and the balance in installments which would be determined on the basis of an assessment of the need for international liquidity. There could be provision for a member with payments problems to draw down in advance some future installments.
No distinction would be made in any respect between SDRs received by countries under general allocations and SDRs allocated contingent upon the relinquishment of gold to the gold account. The gold account would not be allocated, nor would it hold or otherwise use SDRs for substitution purposes. This approach rests on the assumption that no financial incentive would be needed to foster substitution in view of the fact that members would exchange an asset frozen in practice for a more readily usable asset, with a predictable value. It could be argued that members, who will be net users of SDRs acquired for gold, and who would therefore have to pay charges, would have been better off had they settled with gold; however, cession of gold in payment of a debt also entails a loss, namely the potential income on the proceeds of gold sales.
Each member that would benefit from such allocation would relinquish its gold to a gold consolidation account, henceforth referred to as the gold account, against a noninterest-bearing claim on the account that would be activated only in case of withdrawal from the Fund or liquidation of the Fund. This nonliquid claim would no longer be a monetary asset.
The gold account would not be under the obligation to sell gold on the market. Consideration would have to be given to the use the gold account could make of its gold. Countries that held a consolidated claim on the gold account would have to decide collectively whether to keep gold frozen in the gold account for some time as a physical guarantee for their claim in case of withdrawal or liquidation, or to sell gold on the markets at a later stage and use the proceeds, for instance, for loans to the General Account or investment in securities of other international organizations. It might be envisaged that the gold account could borrow against gold collateral.
2. Gold held by the Fund
(i) Restitution of one sixth of the Fund’s gold would take place, as has been decided at the fourth meeting of the Interim Committee.
(ii) Irrespective of the amounts involved, the following consolidation mechanism could be used for any portion of the balance of the Fund’s gold:
The General Account would relinquish gold to the gold account, in exchange for a consolidated claim on that account, so as to balance the Fund’s books;
The Fund would correspondingly allocate SDRs to the General Account on the basis of SDR 35 per ounce of gold, so as to preserve the liquidity of the General Account;
An additional amount of SDRs, calculated on the basis of the difference between a market related value for the gold relinquished by the General Account and the official SDR price of gold could be allocated by the Fund, for instance to the Trust Fund or directly to member countries in order to associate those members who do not hold a substantial part of their reserves in the form of gold to the increase in international liquidity connected with the increase in the market price of gold.
(iii) The technique sketched under (ii) above could be used for one sixth of the Fund’s gold or for a fraction of that percentage, if no other method were to be found satisfactory to achieve the aim of providing a meaningful amount of resources to the Trust Fund. The same technique could be applied for any part of the remaining four sixths of the Fund’s gold, conceivably pari passu with further restitution.
C. Main advantages
The main advantages of the alternative approach suggested above would seem to be the following:
1. To the extent to which gold would have been relinquished to the gold account, the volume of international liquidity would be isolated from the vagaries of the private gold markets, and central banks would no longer be faced with uncertainty as to the value of their reserves.
2. It would ensure to the same extent a one-way effective demonetization of both gold held by the Fund and gold held by member countries in their reserves. Indeed, if gold has to be phased out as the central reserve asset of member countries, it seems coherent that gold would in the same manner cease to be the central asset of the Fund.
3. The financing of the Trust Fund from the increase in value of one sixth of the Fund’s gold, beyond other possible sources of financing, would become operationally simple, and the amounts available would be known instead of being dependent on the success of sales of gold on the markets. In this way, it would be possible to avoid the basic conflict between the desire to maximize profits on sales of gold to the benefit of the Trust Fund and the effects of such sales in the markets, which frustrate the aim of the operation.
4. Any link between the SDR and gold would disappear, not only as a matter of law, but also as a matter of fact. One might even venture the thought that the decisions on the timing of SDR allocations, contingent upon relinquishment of gold, could be regarded as a decision on the volume of international liquidity in the years to come, without any relation to gold; indeed, such decisions would be based on assessment of the need for international liquidity.
5. The role of the SDR would be considerably enhanced, not only by the mere fact that the total volume of SDRs would increase, but also because of the fact that the General Account would become the beneficiary of SDR allocations. It has become evident in the discussions on the amendment of the Articles that the present provisions concerning the General Account as an “other holder” of SDRs are unduly restrictive, and that the General Account should be given the same rights and obligations as the participants in the SDR system.
6. Members would receive SDRs by way of a technique with which they are familiar, namely allocation, and the SDR system as a whole would remain financially in equilibrium, irrespective of the price of gold on the markets. There would therefore be no built-in pressure for sales of gold on the markets, conflicting with the need to secure a price that would make the staff’s scheme financially sound. Under the alternative presented here, the relinquishment of gold by central banks to the gold account would lead the markets to abandon the expectation that monetary authorities would have to support the price of gold.
D. Points for further consideration
Some aspects of the approach suggested above would need very careful consideration.
1. The price of gold, or, more exactly the total number of SDRs to be allocated contingent upon relinquishment of one ounce of gold, remains a very delicate political and economic issue. However, this issue would seem to be somewhat easier to settle under the suggested approach than under the staff’s scheme. Indeed, the expectations as to the price of gold on the market and members’ aspirations as to this price would become less relevant.
2. The alternative approach raises the problem that a now largely dormant liquidity in the present official gold stock would be transformed into effective liquidity. However, potential inflationary effects of such transformation should not be overestimated, since the increased liquidity would only become available over time in a controlled and rational way, on the basis of an assessment of the need for international liquidity. It should be mentioned, moreover, that any substitution scheme would avoid the potential inequity that could result from the fact that some members might be tempted to do away with their gold on the markets in order to benefit from higher prices, thereby depressing the price at which others might find themselves obliged to use their gold for balance of payment purposes.
3. The allocation of SDRs to the General Account and to the Trust Fund would entail an allocation without a corresponding increase in the obligation to provide currency, since it would not appear meaningful for either the General Account or the Trust Fund to assume such an obligation. However, the overall reduction in the obligation to provide currency in relation with the SDRs outstanding would seemingly be relatively small; moreover, since the members who would relinquish gold would probably be in a position that would enable them to fulfill the obligation to provide currency, the strength of the SDR is not likely to be appreciably affected.
4. The allocation of SDRs to the Trust Fund raises the additional question on how the charges, which are payable on net cumulative allocations, would be met. In order to maintain its financial equilibrium, the Trust Fund’s charges on its lendings would have to be equal to the rate of charges on SDRs, which would conflict with the role of the Trust Fund as a lender on highly concessional terms. However, different solutions could be envisaged, for instance in earmarking part of the gold profits for an interest subsidy on lending of the remainder or in utilizing to this end part of the other sources of financing of the Trust Fund.
5. Some legal problems might be involved in the drafting of withdrawal and liquidation clauses and in the assignment to the General Account of the quality of beneficiary of allocations.
6. It might prove necessary to provide for the possibility of a two-step sterilization of members’ gold, if participation in a first round, though successful, were not widespread enough.
To the extent that less gold would be sold by the Fund, part of the reserve creation would take place in the form of an increase in the value of the gold held by members.
Unless otherwise indicated, references to the Fund in this paper are to the Fund acting as such and without reference to the General Account, the Special Drawing Account, or the gold substitution account.
They could also be increased by the amount for which the participant was subject to subsequent cancellation.
With the exception of the highly unlikely case that (ii) or (iii) of paragraph (6), or the corresponding provisions in (2)(d), would come into play.