Chapter 2. Operating in an Ailing System
- International Monetary Fund
- Published Date:
- February 1996
WHILE MONETARY AUTHORITIES were trying to make viable the new exchange rates agreed at the Smithsonian Institution, Fund officials were, in the first six months of 1972, adjusting the Fund’s policies to the changed international monetary arrangements existing after December 1971. In January 1972 the Executive Board took a decision to permit a temporary resumption of the Fund’s financial operations, disrupted since the suspension of convertibility of the dollar. In February the Fund changed the unit in which its accounts were kept from U.S. dollars to SDRs. In April the Fund made special arrangements enabling the United Kingdom to carry out a large repurchase of pounds sterling held by the Fund. In May a new par value for the U.S. dollar was established. Subsequently several other members, whose currencies were closely related to the dollar, also set new par values. Immediately after the new par value for the dollar went into effect, the Executive Board took a decision putting the Fund’s operations on a more normal basis, replacing the decision of January. In May the Executive Board made known its views about the continued inconvertibility of the U.S. dollar, and in June Fund officials urged that Canada, which had had a floating rate since May 1970, return to the par value system.
FUND OPERATIONS RESTORED
The suspension of convertibility for the dollar on August 15, 1971 had caused problems in the conduct of the Fund’s transactions and operations. Normally, the currencies used in the Fund’s transactions and operations were selected in accordance with the principles and procedures set forth in a statement on currencies to be drawn and currencies to be used in repurchasing, approved by the Executive Board in July 1962.1 Under this decision, subject to other constraints, the currencies used in purchases and repurchases were to be selected in such a way that the ratio between a member’s reserve position in the Fund and its gross holdings of gold and foreign exchange would be roughly equal for each member whose currency was used in the Fund’s transactions and operations. Thus, the proportion of reserves held by members in the form of positions in the Fund would continue to be approximately the same for each member.
The Fund normally conducted its transactions and operations on the basis of par values or, in the absence of agreed par values, on the basis of provisionally agreed exchange rates. Certain rules had existed since June 1954 to enable the Fund to make computations and transactions in currencies of members with fluctuating exchange rates. These rules had been used to cope with the effects of the introduction of fluctuating rates by Canada in May 1970 and by the Federal Republic of Germany and the Netherlands in May 1971. More explicitly, after the announcement by Canadian authorities on May 31, 1970 that the exchange value of the Canadian dollar would not be maintained within the prescribed margins around parity, the Executive Board decided on July 14, 1970 to apply these rules to the Canadian dollar. This decision had enabled the Fund to continue using Canadian dollars in its transactions and operations in the General Account in the second half of 1970 and the first half of 1971 and to adjust the valuation of its holdings of Canadian dollars. Similarly, on May 19, 1971, after the exchange rates for the deutsche mark and the Netherlands guilder were allowed to float, the Executive Board took decisions on ways to determine appropriate exchange rates for the Fund’s transactions and operations in deutsche mark and Netherlands guilders so that the Fund could continue to use these currencies.
After August 15, 1971, almost none of the currencies that the Fund would use in purchases and repurchases and for other transactions and operations had their exchange rates effectively maintained within the margins around parities. Since the Fund had regularized its operations only for three major currencies without par values—the Canadian dollar, the deutsche mark, and the Netherlands guilder—the exchange rates at which the Fund’s transactions and operations in many other currencies would take place suddenly became a widespread problem. Purchases and repurchases through the General Account could no longer be effected 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. Furthermore, members could not use dollars held in their reserves for transactions and operations with the Fund since the Fund held dollars in excess of 75 percent of the U.S. quota and could not accept more of that currency. Moreover, in the absence of agreed arrangements for convertibility, it was difficult for members to use dollars to acquire from other members currencies for use in transactions and operations with the Fund because few members wanted to accept more dollars. Repurchases of currencies held by the Fund were especially hard to effect, as is explained later in this chapter. Finally, without agreement on the values to be used for currencies and gold, how to value the Fund’s assets, which consisted of holdings of members’ currencies and of gold, also became a problem.
Once the Smithsonian agreement was arranged and the Fund’s temporary regime of central rates and wider margins established, the Fund made temporary arrangements for valuing its holdings of currencies and for determining the exchange rates that would be applicable in its transactions and operations. On January 4, 1972, the Executive Board took a decision that was to apply until the new par value for the U.S. dollar became effective. There were several elements to the decision. Within a reasonable period after a member established a central rate for its currency, the Fund would adjust its holdings of the member’s currency in accordance with that central rate. If the member was availing itself of wider margins, the adjustment of the Fund’s holdings of a currency involved in a transaction with the Fund was to be based on the ratio of the representative rate for the member’s currency in the exchange market to the effective parity relationship between that currency and the member’s intervention currency. Participants in the Special Drawing Account that used SDRs were enabled to obtain against SDRs amounts of foreign exchange that corresponded to the prospective par value of the U.S. dollar based on a price for gold of US$38 an ounce, rather than on the par value of the U.S. dollar based on a gold price of US$35 an ounce.
The Fund could again temporarily conduct its transactions and operations.
USE OF SDRs FOR THE FUND’S ACCOUNTS
Two factors coalesced to induce the Fund early in 1972 to change the unit in which it presented its financial accounts and statistics from U.S. dollars, used since the Fund’s origin, to SDRs. First, the U.S. dollar, the most commonly held reserve asset, previously regarded as a unique national currency of constant value, had been devalued in terms of gold and was no longer convertible into gold. Second, the Managing Director, the staff, and several Executive Directors were looking for ways to strengthen the SDR as an international reserve asset, and the change in the status of the dollar provided them with a unique opportunity.
The recommendation that the Fund change the unit in which its financial accounts and statistics were expressed from dollars to SDRs came from the staff in February 1972. The change would affect the Fund’s General Account (SDRs were already used as the unit of account in the Special Drawing Account). In making the recommendation to the Executive Board, the staff emphasized the obvious necessity of the Fund’s having a common standard by which to measure its assets, which comprised many national currencies and gold. The Fund had to present its balance sheet and its financial operations, for example, in some common unit. Under the Articles of Agreement then in force, the Fund had to maintain the gold value of its assets, but this could be achieved whether the Fund’s financial accounts were expressed in U.S. dollars specified as a given weight or fineness of gold, in another currency with a defined gold content, in grams of gold, or in SDRs which had a fixed gold content.2
Of these possibilities, the staff argued for the use of SDRs. Accounting in SDRs was preferable to accounting in a national currency because SDRs had a fixed value in terms of gold and thus their use would avoid the problems that resulted whenever the value of a national currency was changed. Accounting in SDRs was preferable to accounting in gold because expression of values in weights of gold, such as grams, was awkward and cumbersome. The use of SDRs to present the finances of the General Account would make its presentation consistent with that of the Special Drawing Account. Furthermore, the use of the SDR as an accounting unit would advance the idea that the Fund had its own asset in which to express its balance sheet and other financial statements just as countries used their own national currencies to express their financial accounts. Users of the Fund’s accounts might have some initial difficulty in comprehending the value of the Fund’s assets or the cost of its operations expressed in SDRs, but the staff believed that this difficulty would diminish or disappear as transactions in SDRs became more frequent and as familiarity with the SDR increased.
The staff considered the possibility that the Fund’s accounts could be presented in terms of both SDRs and U.S. dollars but rejected such a dual presentation because it posed several problems. First, in February 1972 a new par value for the dollar had not yet been formally introduced, and until it was, the Fund was still valuing the dollar at the same gold content as the SDR. In other words, SDR 1 = $1. The presentation of accounts in both units would at the time mean merely duplicate figures. Second, after the new par value for the dollar and a higher price for gold in terms of dollars went into effect, a different relationship would exist between the dollar and the SDR (that is, $1.08 would equal SDR 1) and between the dollar and many other national currencies. Two different values for Fund transactions—one in SDRs and another in U.S. dollars—would be confusing. Moreover, the Fund had already been expressing the value of certain operations, such as repurchases and stand-by arrangements, solely in SDRs, a valuation which emphasized the constant gold value of assets and liabilities in the General Account. Third, when the new par value for the dollar was formally introduced, values in the General Account expressed in dollars would increase: financial statements of the General Account before and after the change of the gold value of the dollar would not be comparable. Fourth, presentation of the Fund’s financial statements in two accounting units would involve higher administrative costs.
On February 25, 1972 the Executive Board decided to recommend to the Board of Governors that in view of the SDR’s fixed gold value, its international character, and its role as an international reserve asset, the Fund’s By-Laws be changed to provide for the presentation of the accounts of the General Account in SDRs. In the discussion preceding the decision, Claude Beaurain (France) expressed the well-known preference of the French authorities for the use of gold as the appropriate unit of account. If the SDR was to be used, he felt the Fund should emphasize its gold content by using the phrase “units of account expressed in terms of 0.888671 gram of fine gold,” rather than using the phrase “in terms of SDRs.” He pointed out that the ec countries were already using an accounting unit expressed in gold. Other Executive Directors, however, clearly preferred SDRs to gold as the Fund’s accounting unit. Furthermore, they did not like using the awkward phrase expressing the SDR in terms of its gold content. Giinther Schleiminger (Federal Republic of Germany) in particular supported the use of the SDR as the Fund’s accounting unit. He stressed that SDRs placed the Fund in a unique position compared with other international organizations in that the Fund had its own asset and could use it for accounting purposes. When the decision was taken, Mr. Beaurain formally objected.
The Executive Board’s recommendation was approved by the Board of Governors, effective March 20, 1972.3 The Fund’s internal confidential accounts, the accounts and statistics describing the Fund’s transactions and operations in its internal reports, and data for the Fund’s transactions and operations in its publications have been all subsequently expressed in terms of SDRs.
ARRANGING FOR REPURCHASE BY THE UNITED KINGDOM
The inconvertibility of the dollar after August 15, 1971 caused especially difficult problems in effecting repurchases. Most members had sizable reserves of dollars and wanted to use them to repurchase outstanding drawings from the Fund, especially since their liabilities to the Fund were expressed in terms of gold and they wanted to reduce these liabilities before the price of gold went up further. Likewise, because they expected further increases in the price of gold, they preferred to repurchase with dollars rather than with SDRs whose value was fixed in terms of gold. Until the mid-1960s, members had customarily and with ease used dollars to repurchase their currencies from the Fund. Beginning in 1964, however, it was not always possible for members to use dollars directly in repurchases because the Fund often held dollars in amounts in excess of 75 percent of the U.S. quota and could not accept dollars in repurchases. To help members make repurchases, the U.S. authorities from time to time made drawings on the Fund called turnstile drawings: the U.S. authorities purchased from the Fund currencies that the Fund could accept in repurchase and then sold these currencies at par to countries that wished to use the dollars they held to fulfill their repurchase obligations to the Fund.
After the suspension of convertibility of the dollar, however, the U.S. authorities became notably reluctant to use gold-related positions in the Fund or primary reserve assets—gold and SDRs—to facilitate repurchases. Hence, it became impossible for members to effect repurchases in dollars. At the same time, other members whose currencies might be used in repurchase were hesitant to see their creditor positions in the Fund diminished by this use of their currencies. Such repurchases decreased their holdings of assets fixed in terms of gold. Moreover, the repurchasing member was likely to obtain currencies for the repurchase by offering dollars, and many Fund members did not want to accumulate more dollars since dollars could no longer be converted into gold or SDRs.
To enable repurchases to be effected, in October 1971 the Fund staff worked out ad hoc turnstile arrangements. Three members that had creditor positions in the Fund—Canada, France, and the Federal Republic of Germany—agreed to what amounted to a revolving fund using their currencies. Canadian dollars, French francs, and deutsche mark might be used for repurchases to the extent that drawings had been made in these currencies since August 15,1971, provided that consultation with the member whose currency was being used preceded each repurchase transaction. For the next several months all drawings and repurchases were effected in these three currencies. By these arrangements members avoided any enlargement of their dollar holdings as a result of transactions through the Fund; yet these arrangements allowed repurchases to be effected that might otherwise have had to be postponed. In March 1972 the number of currencies included in the turnstile arrangements was increased to include Austrian schillings, Italian lire, and Japanese yen. In addition, the Fund arranged for the use of pounds sterling in drawings.
Early in 1972 a repurchase problem arose, whose solution became unusually involved and complicated. Citing details of the problem and of its solution reveals how difficult it was for the Fund to carry on its normal operations during this period, how strongly U.S. authorities opposed providing even a very limited convertibility of the dollar following the August 1971 suspension, how the Deputy Managing Director took the initiative in devising a solution, and how in a spirit of international cooperation the Canadian authorities in effect provided the convertibility that U.S. authorities refused.
In March 1972, Derek Mitchell (United Kingdom) advised the Acting Managing Director, Frank A. Southard, Jr., that the U.K. authorities were in a position to repurchase all the Fund’s holdings of pounds sterling in excess of 75 percent of the U.K. quota and that they would like to do so as soon as possible. The amount of the repurchase was to be the equivalent of a little more than SDR 1,150 million. This amount was made up of two components, SDR 950 million resulting from the drawings on the Fund by the United Kingdom in 1969 and 1970 under the stand-by arrangement for $1.0 billion approved in June 1969, and SDR 200 million representing payments made by the United Kingdom to the Fund in pounds sterling, mainly for charges on these drawings.4
In asking to make this repurchase, Mr. Mitchell emphasized to the Fund management that the 1969 stand-by arrangement and the Fund’s subsequent close surveillance of the U.K. economic situation had received adverse comments in the U.K. press and in the U.K. Parliament. Hence, for domestic political reasons the U.K. authorities were especially eager to repay all their outstanding indebtedness to the Fund and to announce the repayment publicly as soon as possible. Since the United Kingdom was likely to incur a substantial repurchase obligation under Article V, Section 7(b), by April 30, 1972, the U.K. authorities wanted to undertake the repurchase before April 30, 1972 in order to present it as voluntary.
The turnstile arrangements were, however, inadequate for this large repurchase transaction. The U.K. authorities, frustrated in their desire to repay their debts to the Fund and to reinstate the United Kingdom’s gold tranche position, sought advice from the Fund management on how to effect the repurchase. The management proposed an arrangement under which the United Kingdom, the United States, and, acting as a group, eight countries which were then net creditors in the General Account—Austria, Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, and the Netherlands—would participate in the U.K. repurchase. They would participate with primary reserve assets (gold, SDRs, and Fund positions) to the extent of one third each, the equivalent of about SDR 400 million, for a total of about SDR 1,200 million.
The arrangement would work as follows: (i) the United Kingdom would use SDRs in an amount equal to one third of the Fund’s holdings of pounds sterling above 75 percent of quota and for the balance would use U.S. dollars to acquire currencies acceptable to the Fund in repurchases; (ii) simultaneously with the U.K. repurchase, the United States would purchase within its gold tranche pounds sterling in an amount equivalent to one third of the Fund’s balances of pounds sterling above 75 percent of the U.K. quota, thereby restoring by one half the creditor positions of members whose currencies were used in the repurchase; and (iii) the eight countries which were net creditors in the General Account and whose currencies the Fund could accept in repurchase would accept the concomitant reductions in their Fund positions. The reduction in the net creditor positions of each of the eight countries would be in proportion to their reserve positions in the Fund.
When the management assembled the Executive Directors of the ten members concerned for informal talks, it became quickly apparent that the proposed three-way equal participation was not acceptable. The U.S. authorities in particular had trouble with it. As Mr. Dale explained to the other Executive Directors, the U.S. authorities considered the arrangement unfair to the United States and believed that it would involve a greater loss of gold than the United States could afford. The United Kingdom would receive a large gold tranche position in the Fund, enhancing its primary reserve assets, that is, gold, SDRs, and positions in the Fund, while the United States would suffer not only a reduction in its primary reserve assets but even in its basic gold reserves. The U.S. authorities noted further that the contribution of the eight net creditors in the General Account would change only the composition of their primary reserve assets and would not reduce these assets. In the view of the U.S. authorities, the maximum gold tranche purchase of pounds sterling that the United States could afford was the equivalent of SDR 200 million.
An alternative, even more complicated, arrangement was worked out. First of all, it involved a total of SDR 1,150 million rather than SDR 1,200 million. The eight creditor countries mentioned above were willing to increase their participation from SDR 400 million to SDR 500 million. With SDR 200 million from the United States, that still left SDR 450 million to be financed. Of this amount, the U.K. authorities felt that they could pay a maximum of SDR 400 million. The remaining SDR 50 million was forthcoming through an exceptional compromise arranged between the authorities of Canada and Mr. Southard, as Acting Managing Director. The Canadian authorities had indicated a willingness to carry out an operation of up to SDR 50 million with either the United States or the United Kingdom as a means of reaching agreement on the U.K. repurchase. Mr. Southard worked out the details for the Canadian authorities to transfer to the United Kingdom an amount of gold equivalent to SDR 25 million and SDR 25 million (in SDRs) in exchange for pounds sterling. Both the gold and the SDRs were immediately turned over to the Fund by the United Kingdom. The U.K. authorities were thus able to use SDR 425 million in SDRs and SDR 25 million in gold in their repurchase transaction with a net use of only SDR 400 million.
The Executive Board approved these arrangements on April 26, 1972. The next day the Chancellor of the Exchequer, Anthony Barber, publicly announced that the United Kingdom had repurchased all the pounds sterling held by the Fund in excess of the U.K. quota.
NEW PAR VALUE FOR THE DOLLAR
Establishing a new par value for the U.S. dollar in May 1972 was the most important step taken by monetary authorities in 1972 to restore a system of par values after the disturbances of 1971. As mentioned in Chapter 1, the U.S. Congress had to approve any change in the par value for the dollar. Because of the need for Congressional approval, the monetary authorities gathered at the Smithsonian Institution in December 1971 had understood that establishing a new par value for the U.S. dollar would take some time. At the Smithsonian meeting, U.S. monetary authorities had indicated informally to the other participants that they hoped to be in a position to propose the par value to the Fund by April 30,1972. The Fund and most of its members wished to have the new par value for the U.S. dollar formally put in place as soon as possible. A new par value for the dollar would indicate that the par value system, at least in a limited form, had not yet been abandoned. Also, a new par value for the dollar would enable the Fund again to conduct its financial operations on a more normal basis.
On February 9, 1972 Mr. Connally sent to the U.S. Congress a draft bill “to provide for a modification in the par value of the dollar and for other purposes,” known as the “Par Value Modification Act.” As Mr. Dale explained to the Executive Directors seeking clarification about the timing of the U.S. action, two bills had to be passed by the Congress. A par value bill would authorize the change in par value, and a related appropriations bill would enable the United States to make the required payments to the Fund and to other international financial institutions, such as the International Bank for Reconstruction and Development (ibrd), hereafter referred to as the World Bank, the Inter-American Development Bank (idb), and the Asian Development Bank (asdb), to maintain the value in terms of gold of dollars held by these institutions. The U.S. authorities had decided not to propose the change in par value to the Fund until Congress had passed the appropriations bill. Mr. Dale assured the Executive Directors that the U.S. authorities intended to take the necessary action in the Fund regarding the dollar at the earliest possible moment so as not to generate any uncertainty about the new par value for the dollar.
Congress approved the par value bill on March 31, 1972.5 Twice during April, Mr. Dale again explained to the Executive Directors the need for an appropriations bill and indicated that the U.S. authorities were still hoping Congress would approve it by the end of the month. Action was delayed, however, and it was not until May 5, 1972 that Mr. Connally sent a letter to Mr. Schweitzer officially proposing a change in the par value of the dollar, from one thirty-fifth to one thirty-eighth of a troy ounce of fine gold, to become effective at noon on May 8, 1972. The par value for the dollar was to be altered from 0.888671 to 0.818513 gram of fine gold per dollar, or from $1.00000 to $1.08571 per SDR. This change, a 7.89 percent devaluation of the dollar in terms of gold, fell within the terms of Article IV, Section 5(c)(i), of the Articles of Agreement that permitted a member to change the initial par value of its currency up to 10 percent without objection by the Fund. Since the Fund did not have to take any action on a change of this degree in the par value for the dollar, it merely noted the change.
Other Par Value Changes
The establishment of a new par value for the dollar led to several other members changing the par values for their currencies. Some members that had communicated central rates to the Fund now proposed par values, discontinuing their central rates. Others that had maintained their exchange rates with the U.S. dollar since December 18, 1971 now set par values formalizing the relationship between their currencies and the dollar. Members that changed their par values between May 8, when the par value for the dollar was changed, and June 1, 1972 were China, the Dominican Republic, El Salvador, Greece, Guatemala, Honduras, Iceland, Israel, Jordan, Liberia, Mexico, Nepal, Nicaragua, Pakistan, Somalia, and Thailand.6 The changes in the par values of these 16 members are listed in Table 1.
|Grams of Fine Gold|
per Currency Unit
Units per SDR
|China1||NT dollar||0.0222168||0.0204628||40.0000||43.4286||May 8|
|Dominican Republic||peso||0.888671||0.818513||1.00000||1.08571||May 9|
|El Salvador||colón||0.355468||0.327405||2.50000||2.71429||May 8|
See fn. 6 on p. 35.
See fn. 6 on p. 35.
The change in Pakistan’s par value was an especially large decrease in the gold value of the rupee, a devaluation of 60.13 percent. Inasmuch, however, as this devaluation was accompanied by the elimination of multiple exchange rates, the effective devaluation of the rupee was much less than 60 percent. It was, nevertheless, about 40 percent for imports and between 15 percent and 25 percent for exports.
Effective May 24, 1972, the Fund also agreed to an initial par value for the rupee proposed by the officials of Mauritius, of Mau Rs 5.55555 = SDR 1. In addition, four other members changed their par values because of the change in the par value for the U.S. dollar, three of them making the changes somewhat ahead of the United States. On April 5, 1972, Guyana proposed a change in its par value, from 0.444335 to 0.409256 gram of fine gold, corresponding to G$2 = US$1, the same relationship between the Guyana dollar and the U.S. dollar that had existed earlier. On April 5, Panama proposed a change in its par value, from 0.888671 to 0.818513 gram of fine gold per balboa, keeping the relationship between the balboa and the U.S. dollar unchanged at B 1.00 = US$1. On April 12, Haiti proposed a change in its par value, from 0.177734 gram of fine gold to 0.163703 gram of fine gold per gourde, keeping the relationship between the gourde and the U.S. dollar unchanged at G 5.00 = US$1. Since these three changes represented changes of less than 10 percent from the initial par values for the currencies of these members, the Fund merely noted the changes. On May 8 Costa Rica announced that the par value of the colón was being changed from 0.134139 to 0.123549 gram of fine gold, although the new par value had not yet been agreed with the Fund.
NORMAL FUND OPERATIONS RE-ESTABLISHED
A decision adopted by the Executive Board on May 8, 1972, the same day the new par value for the U.S. dollar became effective, replaced the temporary decision of January 4,1972 regarding the exchange rates to be used in the Fund’s transactions and operations. The new decision was to apply only to those currencies for which exchange rates were not maintained within the 1 percent margins prescribed by the Articles of Agreement or within the 2 percent margins permitted by the Executive Board decision of 1959.7 These currencies were to be valued at exchange rates derived from market exchange rates, that is, on the basis of the representative rate for the currency as established under Rule O-3 of of the Fund’s Rules and Regulations, rather than on the basis of par values or central rates.8 For all other currencies, including the U.S. dollar, the French franc, and the pound sterling, the Fund again operated on the basis of agreed par values.
ARGUMENTS OVER INCONVERTIBILITY OF THE DOLLAR
After the establishment of a new par value for the dollar and the decision to conduct again the majority of the Fund’s transactions and operations on the basis of agreed par values, some semblance of order seemed to have been restored to the international monetary system. The element from the previous par value system still missing, however, was convertibility of the dollar. Since August 15, 1971, European officials had been pressing U.S. officials to restore, or at least to promise to restore, some degree of convertibility to the dollar. They regarded as an anomaly a system in which there existed a par value for the dollar but in which there was no mechanism to defend that par value, as indicated by a willingness of the U.S. authorities to convert dollars into reserve assets at that par value. But, as mentioned earlier, European authorities were particularly disturbed at the prospect of having to accumulate more holdings of inconvertible dollars. They viewed as a bad omen the reluctance of the U.S. authorities to restore even the degree of convertibility necessary to enable the Fund to effect repurchases in a normal way. European authorities were especially unhappy, for example, about the position that the U.S. authorities had taken in April on the repurchase by the United Kingdom.
The inconvertibility of the U.S. dollar was often criticized in discussions in the Executive Board during the first months of 1972. The Fund management, wanting to restore the Fund’s repurchase operations, tried to help bring about some degree of convertibility. In a speech in February, Mr. Southard, Deputy Managing Director, explained that “it has up to the present time not been possible to work out any arrangements for even the most limited convertibility of the dollar within the Fund.”9 When unrest in exchange markets persisted in March, Mr. Southard, as Acting Managing Director, very aware of the attitude of European authorities, suggested to Mr. Volcker that the U.S. authorities consider giving some degree of convertibility to the dollar. Several weeks later in the course of the staff discussions that were part of the Article VIII consultation with the United States, the staff also raised the same question with the U.S. authorities.
The U.S. authorities felt very strongly on this issue. They were concerned that U.S. gold reserves were already less than one third the value of official holdings of dollars abroad. Officials within the U.S. Government, moreover, were divided over the role of gold in any future international monetary system. Meanwhile, U.S. authorities considered it preferable to hold on to as much gold as possible until reform of the system was worked out. They wanted a large turnaround in the U.S. balance of payments position before they contemplated any commitment to dollar convertibility. For all these reasons, they emphasized in the first months of 1972 that any restoration of convertibility of the dollar would have to be negotiated as part of the reform of the international monetary system. They pointed out, too, that the other participants in the Group of Ten had, as part of the Smithsonian agreement, assented to “nonconvertibility” of the dollar until the system was reformed.
When the Executive Board took up the Article VIII consultation with the United States at the end of May 1972, the issue of dollar convertibility was raised in a rather heated way by most members of the Executive Board from the ec countries. Marc Viénot (France), in particular, regretted what he termed the “intransigent attitude” of the United States toward restoring dollar convertibility. Other members of the Executive Board elected by ec countries, including Pieter Lieftinck (Netherlands), Günther Schleiminger (Federal Republic of Germany), and Heinrich G. Schneider (Austria), wanted to have the Executive Board take a decision calling the attention of the United States to its obligations with respect to convertibility under the Articles of Agreement. They noted that although Article VIII consultations normally did not include decisions, in 1970 decisions were added for some members pursuing practices deviating from their obligations under Article VIII. There had been, for example, decisions on Canada, the Federal Republic of Germany, and the Netherlands with regard to their floating exchange rates. These precedents led many Executive Directors to believe that a decision ought to be added to the consultation with the United States, and they deliberated its nature and wording.
The decision taken reflected to a considerable extent a statement of Mr. Dale that the U.S. authorities intended to collaborate fully with the Fund and with its members and that such collaboration could best occur in the framework of discussions about reforming the system. The Fund noted that the United States did not buy officially held foreign balances of U.S. dollars either under Article IV or Article VIII and welcomed the reaffirmation of the U.S. authorities that they intended to collaborate with the Fund and with its other members to proceed promptly with an appropriate reform or improvement of the international monetary system. Mr. Viénot, emphasizing that he would support a decision only if it clearly urged the United States to comply as soon as possible with the obligations of Article VIII, Section 4 (the obligation pertaining to convertibility), abstained from the decision.
The continuing inconvertibility of the U.S. dollar was to come up on other occasions, too, in the course of 1972. The Italian monetary authorities in particular took the position that, despite the re-establishment of a par value for the dollar, it was preferable for the central rate regime to remain in effect until reform of the system was completed rather than return to the par value system without dollar convertibility. When the Executive Board discussed in May the decision concerning the exchange rates to be used in the Fund’s transactions and operations, the staff suggested that the term “central rate” be abolished, implying that the central rate regime be ended. Francesco Palamenghi-Crispi (Italy), however, objected to its discontinuation.
Several European members, including Belgium, the Federal Republic of Germany, Italy, the Netherlands, and Sweden, as well as Japan, were still using central rates. In July Mr. Schweitzer, on a visit to monetary officials of several members in Europe, suggested that an early transition from central rates to par values, even if not all members could participate immediately, would enhance confidence in the new structure of exchange rates. But when Mr. Schweitzer reported to the Executive Board on his talks in Europe, Mr. Palamenghi-Crispi again stressed that the Italian authorities doubted whether a transition from central rates to par values would be of much use. At the 1972 Annual Meeting in Washington in September, Giovanni Malagodi elaborated his Government’s position. A par value system without dollar convertibility meant that the burden of defending exchange rates fell on countries that had to finance the U.S. deficit and had to continue to accumulate inconvertible U.S. dollar balances.10 Thus, despite the establishment of a new par value for the U.S. dollar, the Italian authorities regarded as imperative the continuation of a central rate regime until a reformed system went into effect.
URGING CANADA TO ADOPT A PAR VALUE
That the Fund was still trying in 1972 to preserve a par value system was exemplified not only by its actions vis-à-vis the United States but also by its urging Canada, which had used a floating rate since 1970, to select a new par value. The staff discussions with respect to the annual Article VIII consultation with Canada were held in Ottawa in May 1972 and the Executive Board discussion took place in July. The staff adduced several reasons why Canada should re-establish a par value. First, since wider margins were available under the Smithsonian agreement, the rate for the Canadian dollar could move in a larger range, making it easier for Canada to defend a par value than under the former narrow margins. Second, the argument of the Canadian authorities against setting a par value—that economic and exchange conditions were unsettled—was likely to be valid indefinitely. Since the Canadian dollar had been floating for nearly two years, it was already more than a temporary float, and no substantive change was likely in the near future. Third, Canada had a strong external payments position. Fourth, the international community could not have faith in an international monetary system in which a country as important as Canada remained permanently exempt from the rules.
At the Executive Board meeting, Robert Bryce (Canada) explained why the Canadian authorities believed that the time was not ripe for Canada to commit itself to maintaining a par value even within the wider margins now possible. The international monetary system was seriously disturbed and there was danger that any par value selected for the Canadian dollar might prove inappropriate and unsustainable in the market. Although the continued floating of the Canadian dollar would not prove a source of disruption for other members of the Fund, the choice of an inappropriate par value could well prove so. The Canadian situation was also an exception. No other major country’s currency was so closely and inextricably linked in trade, in other current transactions, and in capital flows with the United States. At a time such as mid-1972, when the U.S. balance of payments and the U.S. dollar were manifestly in difficulties and in need of substantial adjustments, Canada had good reason to fear the consequences of such difficulties and adjustments.
Mr. Dale stressed that his authorities tended to agree with the Canadian authorities that a par value for the Canadian dollar should not be declared. The U.S. authorities believed that the trade deficit of the United States vis-à-vis Canada in 1972 was abnormally large and still had to be corrected. The par value suggested by the staff for Canada seemed to U.S. officials to undervalue the Canadian dollar.
Australian, European, and Japanese officials, however, were much less willing than were U.S. officials to give up attempts to retain a system of par values. Executive Directors appointed or elected by Australia, by the ec countries, and by Japan all believed that Canada should reconsider its exchange rate policy with a view to ending its floating rate and to setting a new par value. The strongest views were voiced by Lindsay B. Brand (Australia), who emphasized the belief of most Executive Directors that stable exchange rates were far superior to other rates because they reduced uncertainties in an uncertain world and thus facilitated trade. Mr. Lieftinck agreed with the staff view that the arguments used by the Canadian authorities for retaining a floating rate could be used in almost any circumstances. The existing uncertainties in the international monetary system might last for some time and the vulnerability of Canada’s economy and balance of payments position to developments in the United States was likely to persist. André van Campenhout (Belgium) and Messrs. Suzuki and Viénot likewise argued that the Canadian authorities were in a position to establish a par value. Interestingly enough, inasmuch as most developing members of the Fund continued to maintain fixed exchange rates and most Executive Directors elected by developing members usually argued for fixed rates, the Executive Directors and Alternate Executive Directors from developing members were most sympathetic with the argument of the Canadian authorities that continued uncertainty about the whole international monetary system induced them to keep a floating rate.
After this discussion, the Executive Board took a decision in which the Fund urged the Canadian authorities “to reconsider its nonobservance of a par value” and noted that Canada’s compliance with its international obligations in this respect would contribute to a better functioning of the international monetary system.
DEVELOPING MEMBERS’ ECONOMIC CIRCUMSTANCES
When 1972 began, developing members, like industrial members, were suffering from the effects of the slowdown in world economic activity in 1970 and 1971.11 In particular, their exports had been growing at a slower rate than in the 1960s. Their aggregate current account deficit had been steadily increasing from less than $5 billion a year on average in the mid-1960s to $8 billion in 1970 and $9.5 billion in 1971. These increasing current account deficits derived primarily from higher payments for international services, such as earnings on foreign investment and the servicing of external debt; there was little change in the collective trade deficit of developing members.
The current account deficit of developing members as a whole in 1971, as in the years since the mid-1960s, was not a problem, however. The deficit was more than covered by net inflows of capital and foreign aid so that for developing members as a group, an overall balance of payments surplus existed. In fact, in 1971 developing members shared with several industrial members the payments surpluses that were the counterpart of the large payments deficit of the United States, and capital inflows to developing members rose considerably faster than their aggregate current account deficit. Developing members did, however, experience some payments problems. Most capital inflows were of short-term funds and of unidentified capital, not the type of funds that developing members could confidently count on for any length of time. Moreover, the overall balance of payments surplus of developing members as a group was unevenly distributed. Much of the surplus was that of Middle Eastern countries, which benefited from what was at the time an unprecedented increase of more than 20 percent in the average unit value of petroleum exports.
The position of developing members improved again in 1972. Recovery in the economies of the industrial members strengthened demand for primary products. Also, toward the end of the year there began an unusually large spurt in commodity prices. Commodity prices other than those for petroleum rose from 1971 to 1972 by an average of 13 percent, showing large increases after years of weakness for a number of nonfood agricultural items—such as copra, cotton, jute, linseed oil, rubber, and wool. As a result, the payments positions of developing members in 1972 were considerably bolstered. They had a collective trade surplus of $3 billion, reducing their aggregate current account deficit to less than $7 billion. Furthermore, since international credits were generally more plentiful and interest rates lower than in the two preceding years, developing members experienced an enlarged capital inflow. Consequently, they had an unprecedented overall payments surplus in 1972 of more than $8 billion, of which $4.5 billion was for countries whose main exports were commodities other than petroleum. Among developing members, Brazil was the largest recipient of capital by far, but relatively large net capital inflows went also to Colombia, Egypt, Iran, Israel, Korea, Mexico, and Venezuela.
In 1972, officials of developing members also began to express a more unified position on international monetary questions. With negotiations on measures to reform the international monetary system about to get under way, they set up their own Group of Twenty-Four, formally the Intergovernmental Group of Twenty-Four on International Monetary Affairs, which held its inaugural meeting at both the ministerial level and at the level of deputies in Caracas in April 1972.
That the financial officials of developing members were beginning to articulate a common position on exchange rates was apparent, too, at the 1972 Annual Meeting. Several of the Governors from developing members, such as Sambwa Pida Nbagui, D.T. Matenje, J.M. Mwanakatwe, Ali Wardhana, David H. Coore, and Mohamed A. Merzeban, underscored their interest in fixed exchange rates and a system of par values by emphasizing the adverse effects for developing members of changes in exchange rates by the main industrial members.12 Moreover, with a prescience that Governors for industrial members did not express—or did not dare to express for fear of upsetting exchange markets—some of the remarks of the Governors for developing members suggested a serious concern about the viability of the exchange rates established at the Smithsonian Institution.
History, 1945–65, Vol. I, pp. 516–20, and Vol. II, pp. 448–59.
Unless otherwise specified, references to the Articles of Agreement in this History are to the Articles as they existed after the First Amendment became effective on July 28, 1969 and before the Second Amendment became effective on April 1, 1978. These Articles were in force for all except the last nine months of the period covered here. In subsequent chapters, the numerous references to the Second Amendment, and even to the original Articles, are clearly indicated.
E.B. Decision No. 3577-(71116), March 20, 1972, and Resolution No. 27–3; Vol. III below, p. 556.
The drawings the United Kingdom made under the stand-by arrangement approved by the Fund in November 1967 had already been repaid in 1971. History, 1966–71, Vol. I, p. 351.
Public Law 268, 92nd Cong., March 31, 1972, 86 Stat. 116.
Between 1949 and April 1980 China was represented in the Fund by the authorities of Taiwan. A letter from the Foreign Minister of the People’s Republic of China to the Managing Director dated April 1, 1980, states: “The Government of the People’s Republic of China, being the sole legitimate Government of China, is the only Government that can represent China in the International Monetary Fund and in its Special Drawings Rights Department.”
This decision of 1959 was described in History, 1945–65, Vol. I, pp. 469–70.
Rule O-3, as adopted in 1969, can be found in History, 1966–71, Vol. II, p. 187.
“The Financial Setting: Current Status and Future Directions—International Finance,” remarks by Frank A. Southard, Jr., at Panel Discussion, The Conference Board, New York, February 23, 1972, published in International Financial News Survey (Washington: International Monetary Fund), Vol. 24 (March 1, 1972), pp. 57–59; reference is to p. 59.
Statement by the Governor of the Fund for Italy, Summary Proceedings of the Twenty-Seventh Annual Meeting of the Board of Governors, 1972 (Washington: International Monetary Fund, 1972), pp. 79–80. (Hereafter cited as Summary Proceedings, 19–.)
The Fund used the following classification of members plus Switzerland in its statistics and reports (but not for purposes of policies) during the period covered by this History:
Industrial countries: Austria, Belgium, Canada, Denmark, France, the Federal Republic of Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States.
Primary producing countries in more developed areas or “more developed primary producing countries”: Australia, Finland, Greece, Iceland, Ireland, Malta, New Zealand, Portugal, Romania, South Africa, Spain, Turkey, and Yugoslavia.
Primary producing countries in less developed areas or “less developed primary producing countries,” often shortened in this History to “developing countries”: all other members.
In addition, at times, the less developed or developing countries were subdivided to distinguish 13 “major oil exporters”: Algeria, Bahrain, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Also in the Fund’s statistics, figures for “world” trade, “world” reserves, or “world” output customarily meant Fund members plus Switzerland.
Statements by the Governor of the Fund for Zaïre, the Governor of the World Bank for Malawi, the Governor of the Fund and the World Bank for Zambia, the Governor of the Fund for Indonesia, the Governor of the Fund and the World Bank for Jamaica, and the Governor of the World Bank for Egypt, Summary Proceedings, 1972, pp. 31, 88, 98–99, 140, 192, and 196–97.