- International Monetary Fund
- Published Date:
- February 1996
THE SEVEN YEARS from January 1, 1972 to December 31, 1978 were the most complex and difficult that the Fund had so far experienced. In March 1973 the system of par values, which had been under severe stress for the previous five years, broke down altogether. As a primary function of the Fund was to implement a system of par values, several critics intimated that the Fund had outlived its usefulness.
The collapse of par values and the introduction by nearly all the Fund’s members of exchange arrangements contradictory to the Articles of Agreement were only the start of the troubles that the Fund had to face. Beginning in 1973, the Fund’s members were plagued with the deepest economic and financial problems of four decades. Inflation reached historically high levels for most industrial countries. Steep increases in prices for crude oil brought on massive balance of payments deficits for all members except for a few oil exporters which were, in turn, suddenly faced with massive surpluses. The most severe worldwide recession since the 1930s ensued in 1974–75, and in a hitherto unknown phenomenon, rising prices coexisted with high unemployment in industrial countries. Even after recovery, economies grew much more slowly than in the 1960s. The new floating exchange rates introduced in lieu of par values underwent wide fluctuations. Intense speculation in gold caused its price to soar to unprecedented levels, obviating its use for settling financial transactions. As non-oil developing members borrowed to finance their huge deficits, several rapidly piled up external debts. International monetary cooperation was sorely tested.
In response to these developments the Fund undertook to reshape its functions and to redirect its activities. In doing so, it became so integrally involved with the newly evolving international monetary system that disentangling developments in the system from developments in the activities and policies of the Fund was impossible. The history of the Fund during 1972–78 is in many respects the history of the international monetary system.
The last Fund History ended with December 1971.1 January 1972, besides being consecutive, is for many reasons an appropriate starting date for another episode of Fund History. As the year opened, monetary authorities (including the Governors, the Executive Directors, and the Managing Director of the Fund, assisted by the Fund staff) were attempting to make the pattern of exchange rates agreed at the Smithsonian Institution in December 1971 hold until a reform of the entire international monetary system could be completed. After three years of talking about the need to realign the exchange rates for the currencies of the large industrial countries, monetary authorities had at last achieved that realignment. After a decade of discussion about reform of the international monetary system, full-scale negotiations were about to begin. A new era was in the offing.
December 1978 ends that era. Amended Articles of Agreement had recently come into force, concluding efforts to reform the system. The international monetary arrangements evolving since August 15, 1971, when official convertibility for the dollar was suspended, were now sanctioned by international law. By December 1978, moreover, the disequilibrating effects on the imbalances in international payments immediately following the huge jump in oil prices of 1973 had just about worked themselves through the financial system, which had somehow managed to cope. What was later to be termed “the first round of oil price rises” was regarded as over.
Selecting a framework suitable to narrate the activities and policies of the Fund from 1972–78 and related developments in the international monetary system has been anything but easy. Complicated, interrelated developments took place concurrently. As the Fund tried to solve one problem, it found that the solution depended upon resolution of still another problem. Furthermore, in presenting the history of the Fund, it has been essential to supplement any chronicle or narrative with analysis.
The present approach is topical and chronological. The Narrative and Analysis is divided into 12 Parts, each treating a different topic. The Parts are arranged as chronologically as possible, the chronological order is frequently noted, and a detailed Chronology is given at the end of Volume II. To introduce topics and to tie together interrelated developments, several chapters begin with explanatory material.
Part One (Chapters 1–6) relates the events from January 1, 1972 to March 19, 1973 that brought about the final demise of the system of par values and ushered in the new regime of “widespread floating.” Carl Sandburg noted that a tree is best measured when it is down; so the par value system, as agreed in 1944, can best be assessed after it was felled. Concluding Part One (Chapters 5 and 6) is a retrospective analysis of the par value system. Part Two (Chapters 7–14) discusses the negotiations for a reformed system, which also started in January 1972 and went on until June 1974. A detailed description of the negotiations, especially those carried on in the Committee of Twenty, is followed by a discussion of the reasons for the failure of the negotiations and an assessment of the results achieved (Chapters 13 and 14).
The continuation of floating exchange rates and, most important, the big jump in oil prices announced in December 1973 and the resulting disequilibria in world payments created an atmosphere of crisis, especially in the context of failure to agree on a reformed system and the end of the Committee of Twenty. Part Three (Chapters 15–19) describes the Fund’s response from September 1973 to October 1974 to this crisis, especially the introduction of an oil facility based on borrowed funds, but also the initiation of guidelines for floating exchange rates, establishment of an Interim Committee and of a Development Committee, and the introduction of an extended Fund facility.
Problems persisted, however, as the 1970s unfolded. The world economy continued to be characterized by high rates of inflation, by much slower economic growth in most industrial countries than had prevailed in the 1950s and 1960s, by chronic disequilibria in world payments, and by wide swings in exchange rates. Moreover, there was no agreement on rules for international monetary arrangements. The Fund relied primarily on only one obligation of members under the Articles of Agreement—the obligation of members to collaborate with the Fund (Part Four, Chapter 20).
In these circumstances, from 1974 to 1978 the Fund undertook three activities. First, it took measures that greatly enlarged members’ use of its resources. It liberalized its compensatory financing facility and approved many more stand-by arrangements (Part Five, Chapters 21–26) than in previous years. To raise money for these activities, members’ quotas were twice enlarged and a supplementary financing facility was introduced. Since the supplementary financing facility, like the oil facility, was based on borrowed funds, the Fund transformed itself into a financial intermediary, borrowing from some members to lend to others (Part Six, Chapters 27–30). Second, to establish agreed rules for international monetary arrangements, the Fund began in July 1974 a comprehensive redrafting of its Articles of Agreement, but before doing so it had to resolve several issues concerning gold that the Committee of Twenty had left unsettled. In resolving these issues, the Fund agreed to sell some of its holdings of gold and to put part of the proceeds from these sales into a Trust Fund for the benefit of the Fund’s developing members (Parts Seven and Eight, Chapters 31–39). Third, to help solve world economic problems the Fund instituted intensive periodic analysis of the outlook for the world economy (Part Nine, Chapter 40).
Meanwhile, floating rates for the major currencies became a necessary part of the everyday life of monetary authorities and of the Fund. Floating rates had long been advocated by some economists and opposed by others; now experiences with actual floating rates were beginning to accumulate. Some experiences were unfavorable. Moreover, as it seemed increasingly likely that floating rates would persist and as frequent conflicts occurred between the authorities of different countries over developments in exchange rates, the Fund had to find ways to exercise surveillance over these rates. Part Ten (Chapters 41–44) relates developments in exchange rates from 1973 to 1978.
Still another problem of the 1970s was the continued expansion of international liquidity in the form of national currencies. By 1978 Fund officials, as they had in the 1960s, were seeking ways for the international community to gain greater control over international liquidity. Inevitably attention centered on the SDR, the Fund’s own novel reserve asset, whose creation had crowned the Fund’s achievements in the 1960s. Beginning in 1978 several further actions were taken to improve the quality of the SDR as a reserve asset. The resurgence of the SDR in 1978 is discussed in Part Eleven (Chapters 45 and 46).
Part Twelve (Chapters 47–53) presents a detailed picture of how the Fund continued to evolve as an international organization in 1972–78. Many of the Fund’s regular activities, such as holding consultations with members and providing them with technical assistance, were intensified. In addition, the Fund took on added responsibilities regarding the external debt of its developing members, the access of developing members to capital markets, international trade policy, the provision of information, and its relations with other international organizations. The Fund’s relations with commercial banks also grew and became complicated. There were important developments, too, in the Fund’s policymaking process. Finally, the Narrative and Analysis closes with a discussion of the experiences that the Fund had accumulated in its 33 years and of some lessons to be learned from these experiences.
Whatever period is selected for coverage, it is impossible to begin and end precisely with a given year. Great effort has been made, nonetheless, to make these latest volumes of Fund History self-contained. Readers need not have read the Histories describing events before January 1972, as considerable background material has been included in the present volumes. For the reader who wishes further information, numerous footnotes cite relevant passages in earlier Fund Histories. An effort has been made to adhere strictly to the cutoff date of 1978, otherwise the story would never be finished. Specific results of activities going on at the end of 1978—such as a decision taken by the Executive Board, the introduction of a new facility for use of the Fund’s resources, and the completion of sales of gold by the Fund—are, however, noted in footnotes.
Since the history of the Fund is in part the history of meetings and of discussions among financial officials, many officials are mentioned. A few techniques have been adopted for identifying them in a relatively simple way. Those appointed by members as Governors of the Fund and of the World Bank have usually been referred to in these capacities (especially when they were attending meetings of the Fund such as Annual Meetings of the Board of Governors or meetings of committees of the Board of Governors) 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 Chairman of the Executive Board, is referred to as the Managing Director to avoid the need to distinguish the capacity he may have been acting in at the time. At times the term “Fund management” is used to refer to the Managing Director and Deputy Managing Director. There are many references to individual Executive Directors and Alternate Executive Directors. In general, the practice has been followed of using the full name of an official and his country of nationality the first time he is mentioned and using only surnames thereafter. However, in instances where a series of names includes officials not previously mentioned, it has seemed desirable to deviate from this practice and to repeat given names and countries of nationality or in a few instances to omit the given name of an official.
In the years reviewed here, several appointed Executive Directors were replaced, and following the customary biennial elections of Executive Directors, newly elected Directors took office on November 1 of 1972, 1974, 1976, and 1978. Numerous changes took place as well of Alternate Executive Directors. For ease of exposition, these changes have not been spelled out as the narrative proceeds. A description of the main changes in the composition of the Executive Board from 1972 to 1978 is given in Chapter 51.
In the period reviewed here, the names of some member countries were also changed. For ease of presentation, the names in effect on December 31, 1978 have been used except in a few unusual instances.
The earlier volumes of Fund History are The International Monetary Fund, 1945–1965: Twenty Years of International Monetary Cooperation, Vol. I, Chronicle, by J. Keith Horsefield; Vol. II, Analysis, by Margaret G. de Vries and J. Keith Horsefield with the collaboration of Joseph Gold, Mary H. Gumbart, Gertrud Lovasy, and Emil G. Spitzer and edited by J. Keith Horsefield; Vol. III, Documents, edited by J. Keith Horsefield (Washington: International Monetary Fund, 1969), hereafter cited as History, 1945–65; and The International Monetary Fund, 1966–1971: The System Under Stress, Vol. I, Narrative, by Margaret Garritsen de Vries, and Vol. II, Documents, edited by Margaret Garritsen de Vries (Washington: International Monetary Fund, 1976), hereafter cited as History, 1966–71.