IMF History (1972-1978), Volume 1

Chapter 14. Final Outline of Reform

International Monetary Fund
Published Date:
February 1996
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PREPARATION OF A FINAE OUTLINE OF REFORM made up most of the work of the Committee of Twenty in its last five months, from January to June 1974.

At their last three meetings, held on March 27–29, 1974 at the Fund’s headquarters in Washington, on May 7–9, 1974 at the Fund’s Office in Europe in Paris, and on June 10–11, 1974 again at the Fund’s headquarters, the deputies concentrated on getting an agreed text of an Outline. At their March meeting, as they considered a revised version of the First Outline that had been prepared by the Bureau, they debated whether the Outline should be endorsed by ministers. Some deputies favored a document that was the responsibility only of the Bureau as the First Outline had been. In fact, the deputies from France, Andre de Lattre and Mr. Pierre-Brossolette, and those from several developing members, especially Victor E. Bruce (Trinidad and Tobago) and Eduardo J. Tejera (Dominican Republic), were not convinced that any Outline ought to be prepared. The French deputies believed that consensus on an Outline of a reformed system was beyond the attainment of officials in their existing state of disagreement. Deputies from developing members objected to an Outline because none of the specific ideas that they had insisted were in the interest of developing members were being incorporated. Deputies from Canada, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States, however, all supported Mr. Morse in his desire to aim for an Outline agreed upon by the Committee of Twenty and explicitly endorsed at ministerial level. Mr. Volcker particularly pushed for an Outline on the grounds that it was important for financial officials and for the world to have an Outline as “an agreed vision” of the course in which the international monetary system should gradually evolve. The majority of deputies were persuaded that an Outline officially endorsed by the Committee of Twenty was a good idea.

At their meeting in May, the deputies prepared the final text. All except the French deputies regarded this text as having been agreed upon by the Committee of Twenty at the deputy level. Since the French deputies had participated closely in the drafting, Mr. Morse hoped that they, too, would accept the final text. At their meeting in June, the deputies finished their work and were ready to turn over the Outline to their ministers.

When the members of the Committee of Twenty assembled for their sixth and last meeting in Washington, on June 12–13, 1974 at the Eugene R. Black auditorium of the World Bank, many members, especially from the large industrial countries, had changed. Several ministers of finance had moved on to become heads of state. Indeed, the large number of finance ministers who rose to political prominence and who became heads of government or state in the 1970s indicates the great political importance which economic and financial affairs had in the world of the 1970s. By June 1974 Valéry Giscard d’Estaing, who had attended the previous five meetings of the Committee of Twenty, had become President of France, and Jacques de Larosière, Director of the Treasury, Ministry of Economy and Finance, was designated representative of France to the Committee of Twenty’s final meeting, representing Jean-Pierre Fourcade, the Minister of Economy and Finance of France; Helmut Schmidt, who had attended four of the Committee of Twenty meetings (missing only the first one in September 1972) had become Chancellor of the Federal Republic of Germany, and Hans Apel was now Minister of Finance and attended the last Committee of Twenty meeting. Other individuals who had been members of the Committee of Twenty had left public service. George Shultz, who had attended all the previous meetings of the Committee of Twenty, had been succeeded as Secretary of the U.S. Treasury by William E. Simon. Anthony Barber, who had also attended all the meetings of the Committee of Twenty since its inaugural meeting in September 1972, was succeeded as Chancellor of the Exchequer of the United Kingdom by Denis Healey when the Labour Government came into power early in 1974. Antônio Delfim Netto, who had been Finance Minister of Brazil for many years, was succeeded by Mario Henrique Simonsen. Bensalem Guessous, Minister of Finance of Morocco, who had attended all meetings of the Committee of Twenty except the first, was succeeded by Abdel-Kader Benslimane.

There were other changes in the attendance of the Committee of Twenty at the final meeting in June 1974. Willy De Clercq, who had attended all meetings of the Committee except the first, as Minister of Finance and then as Deputy Prime Minister and Minister of Finance of Belgium, did not come to the sixth meeting; Hannes Androsch, Federal Minister of Finance of Austria, represented the constituency. Menasse Lemma, Governor of the National Bank of Ethiopia, who had attended all previous meetings did not come to the sixth meeting; the constituency was represented instead by Shehu Shagari, Federal Commissioner for Finance of Nigeria. John N. Turner, Minister of Finance of Canada, who had attended all previous meetings, was not present at the last meeting; the constituency was represented by David H. Coore, the Deputy Prime Minister and Minister of Finance of Jamaica. Japan had already had a change of Finance Minister at the fifth meeting of the Committee of Twenty, in January 1974; Takeo Fukuda succeeded Kiichi Aichi on the latter’s death.

As a result of these changes, only a few ministers—Y.B. Chavan, Minister of Finance of India; Kjell-Olof Feldt, Minister of Commerce of Sweden; and Ali Wardhana, Minister of Finance of Indonesia—attended all six meetings of the Committee of Twenty. Positions taken by various constituencies on the issues facing the Committee of Twenty were national rather than personal, however, and despite the change of faces, the views expressed remained largely the same.

The meeting began with a statement by Ismail Mahroug on behalf of the Group of Twenty-Four, in which he stressed once more the disappointment of officials from developing members in the results of the reform efforts. They felt also that the Outline of Reform represented an unbalanced approach, which gave much more attention to the problems of the developed than of the developing members. Even the immediate steps for the current situation spelled out in Part II of the Outline were inadequate. Any package of interim measures ought to include a link between SDR allocations and development finance; a solution to the gold problem which neither jeopardized the SDR/aid link nor strengthened the role of gold in the monetary system; an extended Fund facility; an increase in the relative share of developing members in the quotas of the Fund; and establishment of a joint Fund-World Bank committee of Governors, a Development Committee, to parallel a proposed Interim Committee.1

To help meet these points, the 11 Governors from industrial and relatively more developed members noted that the extended Fund facility was on the verge of being established and that the question of quotas in the Fund was to be looked into. They also agreed to the idea of forming a Development Committee. Nothing was agreed about gold, however, and the link between SDRs and development finance was rejected. One of the reasons for this final rejection of the link by the Committee of Twenty was that by the middle of 1974 the volume of world liquidity was clearly excessive and the world was in the throes of the highest rates of inflation since World War II. It was unrealistic, therefore, to expect further allocations of SDRs for some time. In these circumstances, a link between SDR allocations and development finance was not likely to produce additional funds for developing members, and officials of developed members, especially of the United States and the Federal Republic of Germany, more easily won their case against the link.

On this basis, the Committee of Twenty approved a final report to be transmitted to the full Board of Governors, together with an Outline of Reform and accompanying Annexes. This report and Outline were made public on June 14, 1974.2


The report of the Committee to the Board of Governors first explained why the Committee switched its priority from planning an overall reformed international monetary system to working out immediate measures under which existing international monetary arrangements would evolve into a system. Essentially, “the uncertainties affecting the world economic outlook, related to inflation, the energy situation, and other unsettled conditions” had increased since the Nairobi meeting. The world’s balance of payments structure was changing radically, and it was not yet clear to what extent the positions of individual countries would be altered or how adjustment would be achieved. It might be some time before there would be a return to a system based on stable but adjustable par values or to general convertibility. Nor would the full arrangements for management of the adjustment process and of global liquidity necessarily be feasible in the period immediately ahead. At the same time, the Committee regarded it “as of the highest importance that immediate steps should be taken to begin an evolutionary process of reform.” There was, for example, a particular need to maintain close international consultation and surveillance of countries’ balance of payments policies in the Fund and to develop orderly means of financing imbalances, including means of meeting the financial needs of many developing countries.

Both the report of the Committee of Twenty and the Preface to the Outline verified that the Outline was the work of the Committee and not just of the Bureau. The report stated explicitly that the Committee was presenting “its final report, together with an Outline of Reform.” The Preface stated that the Reformed System (that is, Part I of the Outline) “records the outcome of the Committee’s discussion of international monetary reform and indicates the general direction in which the Committee believes that the system could evolve in the future.” The Preface to the Outline made it clear, however, that the Annexes—which treated more fully than the Outline a number of topics on which agreement was not yet reached—were the work of the Chairman and Vice-Chairmen of the deputies. These Annexes recorded the state of the discussion reached by the Committee of Twenty on controversial topics and on which it did not seem useful to pursue discussion further since events had made it impossible to give immediate effect to any full-scale reform even if one could have been negotiated. The Annexes also presented illustrative schemes and operational detail of how the system could operate. The Bureau envisaged that arrangements in these controversial areas, if and when they were agreed, should be implemented as and when the Fund judged it feasible to do so. The Fund might in some cases introduce such arrangements initially on an experimental basis with a view to subsequent agreement on full implementation.

Part I. The Reformed System

The Introduction to Part I of the Outline of Reform stated that there was need for a reformed international monetary system, based on cooperation and consultation within the framework of a strengthened International Monetary Fund, “that will encourage the growth of world trade and employment, promote economic development, and help to avoid both inflation and deflation.” This wording gave explicit recognition to a role for the Fund in fostering economic development and in countering inflation and deflation, purposes not specified in the Fund’s original Articles of Agreement.

The reformed system was to be characterized by six main features:

(i) an effective and symmetrical adjustment process, including better functioning of the exchange rate mechanism, with the exchange rate regime based on stable but adjustable par values and with floating rates recognized as providing a useful technique in particular situations;

(ii) cooperation in dealing with disequilibrating capital flows;

(iii) the introduction of an appropriate form of convertibility for the settlement of imbalances, with symmetrical obligations on all countries;

(iv) better international management of global liquidity, with the SDR becoming the principal reserve asset and the role of gold and of reserve currencies being reduced;

(v) consistency between arrangements for adjustment, convertibility, and global liquidity; and

(vi) the promotion of the net flow of real resources to developing countries.

While the first five features could be regarded as purposes of the Fund after the First Amendment in 1969, the sixth feature had never been regarded as one of the Fund’s primary functions.

The Outline also recognized that attainment of the purposes of reform of the international monetary system depended not only on satisfactory principles to govern the system but also on satisfactory and consistent arrangements for international trade, capital, investment, and development assistance, including the access of developing countries to markets in developed countries.

The Outline also elaborated arrangements in the reformed system for each of a number of specific topics. The section on adjustment was the longest. Countries would take such prompt and adequate adjustment actions, domestic or external, as might be needed to avoid protracted payments imbalances. Also, countries would “aim to keep their official reserves within limits which will be internationally agreed from time to time in the Fund and which will be consistent with the volume of global liquidity.” For this purpose, reserve indicators would be established in whatever way that could be agreed in the Fund.

The Fund was to hold consultations concerning adjustment measures and to exercise surveillance over the adjustment process. These consultations and surveillance were to be conducted at two levels, by the Executive Board and by a proposed ministerial Council. Members would become subject to consultation if there had been a disproportionate movement in their official reserves or if in the judgment of the Managing Director, following informal soundings among Executive Directors, there was prima facie evidence that the country was facing significant imbalances. There would then be an assessment in the Fund which took into account a wide range of factors. While the choice of particular policies was to be left as far as possible to the member concerned, the Fund was to see that a member adopted or reinforced efficacious policies to correct its imbalance. Provision was made for the application of graduated pressures. Floating rates could be adopted in particular situations, subject to Fund authorization, surveillance, and review.

There was a strong presumption in the reformed system against the use of controls on current account transactions or payments for balance of payments purposes, and the Fund and the gatt were to coordinate their positions closely. To control capital flows, countries could use a variety of policies, such as prompt adjustment of inappropriate par values, use of wider margins, the adoption of floating rates in particular situations, and the use of administrative controls, including dual exchange markets and fiscal incentives. They could also harmonize their monetary policies. But they were not to use controls over capital transactions for the purpose of maintaining inappropriate exchange rates or, more generally, of avoiding appropriate adjustment, but otherwise, with certain other qualifications, capital controls were to be allowed. Countries were to cooperate to limit disequilibrating capital flows and to help finance and offset them.

Like many other sections in the Outline, the section on adjustment was full of references to the special position of developing countries and the need to protect and promote their interests. Developed countries were to apply adjustment measures in a manner designed to protect the net flow of resources to developing countries and to help in reaching any targets that were internationally agreed for the transfer of resources. Specifically, as countries with balance of payments deficits took measures to reduce these deficits including reducing outflows of capital, they were, nonetheless, to seek as far as possible not to reduce the access of developing countries and international development finance institutions to their financial markets, or to reduce the volume of official development assistance, or to harden the terms and conditions of that assistance. As countries with balance of payments surpluses, particularly those that were not reaching internationally agreed targets for the transfer of resources, took measures to reduce these surpluses, they were to stimulate capital outflows. Thus they were to seek as far as possible to increase development aid and to relax any restrictions on access to their domestic markets by developing countries and to their financial markets by international development finance institutions.

Developing members were also to receive other special considerations when the rules for adjustment were applied. The Executive Board’s assessment of a member’s need for adjustment action was, in the instance of a developing member, to take into account those characteristics that made it difficult for developing members to achieve prompt balance of payments adjustment without seriously damaging their long-term development programs. A “limited number of countries with large reserves deriving from depletable resources and with a low capacity to absorb imports,” that is, oil exporting countries, were not to be subject to the usual adjustment procedures. Whenever possible, developing members were to be exempt from controls imposed by other members, particularly from import controls and controls over outward long-term investment. Finally, developed members were to try to remove legal, institutional, and administrative obstacles to the access of developing members to their financial markets; for their part, developing members were to avoid policies which would discourage the flow of private capital to them.

The first four of the ten Annexes spelled out rather concretely how some of the principles for the adjustment process might be implemented. Annex 1, using the material of the Technical Group on Adjustment, described how a reserve indicator system might operate. Annex 2 listed all the important forms of graduated pressures that had been proposed and the various methods suggested for activating pressures. While the pressures were not listed in order of increasing rigor, there were comments on what was considered to be the mildness or severity of the pressures. The most extreme form of pressure on a member in large and persistent surplus was the application of “discriminatory trade and other current account restrictions” against it by other members. Annex 3 presented, as illustrative schemes, the two new systems of currency intervention in exchange markets, multicurrency intervention and SDR intervention, discussed by the deputies and explored by the Technical Group on Intervention and Settlement. Annex 4 described criteria and procedures to guide the Fund when members adopted floating exchange rates.

Convertibility, Consolidation, Management of Currency Reserves, and Primary Reserve Assets

The basic objectives of convertibility to be accommodated in the reformed system were stated to be “symmetry of obligations on all countries including those whose currencies are held in official reserves; the better management of global liquidity and the avoidance of uncontrolled growth of reserve currency balances; adequate elasticity; and as much freedom for countries to choose the composition of their reserves as is consistent with the overall objectives of the reform.” The Fund was to keep the aggregate volume of official currency holdings under international surveillance and management. Just how the Fund was to do this, however, still had to be decided. All countries maintaining par values were to settle in reserve assets those official balances of their currencies presented to them for conversion. The Fund was to establish appropriate arrangements to ensure sufficient control over the aggregate volume of official currency holdings. In effect, after many months of debate, no consensus had been reached on which of the two settlement systems—the mandatory or the “on demand” type—ought to prevail. How these two settlement systems could work was described in Annex 5. Reflecting the work of the Technical Group on Intervention and Settlement, Annex 5 also had a third suggestion for a settlement system, developed by the Bureau, which was a middle position between the two extremes.

Elasticity in the settlement system “could be provided” by credit facilities to finance disequilibrating capital flows. Annex 6 repeated, without much advance, the alternative forms of elasticity in addition to credit facilities that had been discussed, including the proposal of the United States for a primary asset holding limit, that is, an upper limit to convertibility. The Fund was to make provision for the consolidation of reserve currency balances to protect the future convertibility system against net conversion of any overhang of such balances. For this purpose, the Fund could establish a substitution account. Annex 7 enumerated ways in which a substitution account could be established. Annexes 6 and 7 were based on the work of the Technical Group on Global Liquidity and Consolidation.

Countries were to cooperate in the management of their currency reserves so as to avoid disequilibrating movements of official funds. Three novel provisions for achieving this objective were listed, but it was noted that these ways of dealing with capital movements were not universally accepted. Countries should respect any request from a country whose currency was held in official reserves to limit or convert into other reserve assets further increases in their holdings of its currency. Countries should periodically choose the composition of their currency reserves and should undertake not to change it without prior consultation with the Fund. Countries should not add to their currency reserve placements outside the territory of the country of issue except within limits to be agreed with the Fund.

The Outline also specified that the SDR was to become the principal reserve asset of the reformed system and that the role of gold and of reserve currencies was to be reduced. The SDR was also to be the numeraire of the system. The Fund was to allocate and cancel SDRs so as to ensure that the volume of global reserves was adequate and was “consistent with the proper functioning of the adjustment and settlement systems.” In assessing global reserve needs and making decisions for the allocation and cancellation of SDRs, the Fund was to continue to follow the principles set out in the existing Articles of Agreement. The methods by which the Fund assessed global reserves were to continue to be studied, however. Annex 8 listed factors suggested, mainly by officials of developing members, for additional emphasis in the Fund’s assessment of global reserve needs in the future, such as the foreign indebtedness of members, the level of their external debt service payments, and the possibility that the low degree of modernization of the economies of many developing members might lead to an underestimation of their reserve needs.

While the effective yield on the SDR was to “be high enough to make it attractive to acquire and hold, but not so high as to make countries reluctant to use the SDR when in deficit,” the Outline contained no concrete statement as to how the SDR was to be valued or how a rate of interest on the SDR was to be determined. Annex 9 listed four techniques for determining the value of the SDR. Consideration was given also to relaxing the existing constraints governing use of the SDR, and seven suggestions for such relaxation were listed.

The Outline observed that appropriate arrangements for gold were yet to be made. Officials agreed that the role of gold should be reduced, but they recognized that gold reserves were currently an important component of global liquidity and should be usable to finance balance of payments deficits. The three solutions for the gold problem considered by the Committee of Twenty were enumerated. Under one solution (advocated mainly by officials of the United States), monetary authorities, including the Fund, would be free to sell but not to buy gold in the market at the market price; they would not undertake transactions with each other at a price different from the official price, which would be retained and not be subject to a uniform increase. Under a second solution (advocated mainly by French officials), the official price of gold would be abolished and monetary authorities, including the Fund, would be free to deal in gold with one another on a voluntary basis at mutually acceptable prices and to sell gold in the market. A third solution (advocated mainly by officials of South Africa) would permit monetary authorities also to buy gold in the market.

Other Arrangements

As described above, the sixth feature of the reformed system was that it was to contain arrangements to promote an increasing net flow of real resources to developing members. The Outline contained a separate section on the link and credit facilities in favor of developing countries. Two forms that a link between SDR allocations and development finance might take were explained. Annex 10, based on the work of the Technical Group on the Transfer of Real Resources, spelled out several of the special concerns of developing members in international monetary arrangements and the need for consistency of arrangements in other economic areas. In the field of monetary arrangements, the Annex discussed adjustment, global liquidity (including the equitable distribution of official reserves and access to official credit facilities), some degree of freedom for developing members to choose the composition of their reserves, and the link.

Finally, Part I of the Outline called for a permanent Council of Governors with one member of the Council appointed by each Fund constituency. The Council would have “the necessary decision-making powers to supervise the management and adaptation of the monetary system.” The Managing Director was to participate in the Council’s meetings.

Characterization of the Reformed System

In an address to the International Monetary Conference in Williamsburg, Virginia, on June 7, 1974, Mr. Morse, the main expert on the reformed system, described what he regarded as its main characteristics.3 Classified by the nature of its exchange rate mechanism, the reformed system was “a more flexible par value system.” While it provided for floating rates in particular situations—because the U.S. dollar might continue to float for a time and the floating of the dollar was likely to lead to widespread use of floating rates for other currencies—the reformed system was to be based upon stable but adjustable par values and was to be equipped with intervention and convertibility arrangements for defending par values. In this way, the reformed system differed substantially from the existing regime in which there was use of floating rates.

A system can be characterized by its principal reserve asset or assets, such as the gold standard, the gold exchange standard, and the dollar standard. The reformed system was to be the SDR standard.

A system can be characterized by the degree to which it is a market system, a managed system, or a mixed system. The reformed system was an internationally managed system. It was managed in that it depended on consultation, assessment, and cooperation within the international community. It was even more a managed system in that there were also to be principles and procedures, implemented through the Fund, to govern the adjustment process, the convertibility system, the management of global liquidity, and the transfer of real resources to developing countries.

Finally, characterized by the extent of its internationalism, the reformed system was one in which members had to give up a greater degree of autonomy to the Fund than they had in the past. In Mr. Morse’s words, the reformed system “aims to take a step forward to greater international authority in all the main areas, but not a frighteningly large step.” Under the reformed system, the Fund had the right to call on members to adjust, and in extreme cases, to reinforce the call with pressures. The Fund was to control, more or less tightly, the aggregate levels of different reserve assets. Moreover, in an unusual display of international cooperation, the reformed system envisaged an adequate aggregate flow of real resources to developing countries.

Another characteristic of the reformed system should be added to those described by Mr. Morse. Classified by whether the system was to be universally applicable to all members as was the par value system or whether the system made distinctions between categories of members, the reformed system, in many of its provisions, explicitly took account of the circumstances of developing members. In other words, there were enough exceptions for developing members that the initial principle of uniformity of the Fund’s code of conduct and policies on use of its resources would no longer hold.4

Part II. Immediate Steps

It was well understood that the reformed system would not come into being immediately and that in the meantime action by the international community was urgently needed on a number of fronts. There was first of all the problem of how to conduct the Fund’s work, especially taking decisions at high political levels, after the Committee of Twenty went out of existence. The SDR was not being used in international transactions, partly because of the “outmoded” way in which it was valued. Floating rates were not subjected to any rules or guidelines. Steeply higher prices for oil, after January 1974, were causing massive current account deficits for most countries. Officials of developing members were eager that the Fund enlarge its financial assistance to them, and it seemed likely that the Fund would do so, but the Fund would have to introduce some new facilities.

The Committee of Twenty worked in close conjunction with the Executive Directors and the Managing Director and staff in the last months of its existence (from January to June 1974), and a number of “immediate steps” were agreed upon by the middle of June, after the Executive Board took the necessary decisions. These immediate steps were described in Part II of the Outline of Reform and were fully endorsed by the Committee of Twenty. These immediate steps and the decisions taken by the Executive Board are described in Chapter 16.


As we have seen in earlier chapters, most officials had begun their negotiations for a reformed international monetary system in 1972 filled with hope and optimism for success. There were good reasons for their optimism. Only three years before, after prolonged debate, they had been able to agree on and introduce the SDR as a reserve asset. At the end of 1971, after months of disagreement, they had been able to agree on a realignment of the major currencies, the first such multilateral determination of exchange rates in history. After more than a decade of discussion about reforming the international monetary system, they had identified the weaknesses of the previous system and the basic changes needed in a new system: the adjustment process had to work better; par values had to be changed more frequently; global liquidity had to be brought under more effective international control; the use of currencies should be made more symmetrical and reliance on the dollar reduced; use of the SDR should be increased; and the system should work so as to help promote the economic development of developing members. Moreover, there was a genuine willingness of nearly all officials to negotiate a reformed system. Although many officials had complained earlier that U.S. officials were reluctant to enter into negotiations for a reformed system, most of them regarded Mr. Shultz’s statement at the 1972 Annual Meeting as paving the way for serious deliberations. Finally, after years of frequent international meetings and gatherings, officials of the more than 120 members of the Fund had gradually come to know each other personally. Their mutual acquaintance made international cooperation easier, as compromises through informal contact could readily occur.

With all these advantages, why then did the Committee of Twenty fail in its mandate to draw up the reformed system? One can only conjecture. This conjecture is discussed under four headings—end of the old world economic order, different circumstances from Bretton Woods, lack of political will, and weakening of governmental authority.

End of the Postwar World Economic Order

Negotiations for reforming the international monetary system undoubtedly had to begin, as they did, in late 1971. After the events earlier in the year, most officials considered it imperative to get on quickly with planning a reformed system. As shown in Chapter 1, they believed that progress toward a reformed system would help maintain the exchange rates agreed at the end of 1971 and thus keep the par value system from collapsing entirely. The Managing Director and the Fund staff were keen to have a reformed system in place so that as the old system fell apart, members would continue to collaborate with the Fund as they substituted new exchange rate arrangements for the arrangements used under the Bretton Woods system. They feared that in the absence of any agreed system, it might be hard to persuade members to continue this collaboration. In addition, officials wanted to start reform negotiations quickly because they believed that their efforts might well be successful.

In retrospect, however, it would seem that if ever a committee proved to have been badly timed, it was the Committee of Twenty. By the end of the 1970s, it was possible to see that the Committee of Twenty, meeting in 1972–74, operated in an environment in which virtually the entire world economic order known since the end of World War II was just starting to crumble. The par value system, which in 1972 looked as if it might still be preserved, was to collapse entirely less than six months after the Committee began its discussions. Toward the end of 1972 worldwide inflation began to spiral and was shortly to become a major economic problem. The importance of inflation as a problem for the world economy was underestimated by the Committee of Twenty, as it was by most other economists and officials at the time. In addition, the most difficult economic circumstance to which the world had to adjust in the last quarter of the twentieth century—higher prices for oil and other fuel—occurred in the midst of the discussions of the Committee of Twenty, upsetting all expectations of a return to equilibria in international payments for the next several years. Higher oil prices not only presented a problem in themselves but the accompanying energy shortage immediately focused world attention for the first time on the potential exhaustion of the world’s supplies of natural resources. Concern about the exhaustion of natural resources, together with new concerns about the pollution of air and water resources and of the environment generally, led to intensive discussion among economists about the limits to economic growth itself.

In these circumstances, plans for a reformed system proved too ambitious and too abstract and required unrealistic commitments by governments. It became hard for officials and economists to envisage the introduction for some years to come of orderly, stable, and systematized international monetary arrangements. Meanwhile, it seemed futile for them to wrangle over features of a system that was unlikely to be put into operation for a decade, if not longer.

Different Circumstances from Bretton Woods

Since the Bretton Woods agreement was successfully negotiated when the world was in a disturbed state, some experts have concluded that the unsettled state of the world does not explain the failure of the Committee of Twenty’s reform exercise.5 There are, however, critical differences in the circumstances attending the two exercises. The Bretton Woods negotiators could prescind from the unsettled state caused by World War II, because it was temporary, and could concentrate on planning for the postwar world. Thus, the prevailing international monetary arrangements had no impact on the positions of the Bretton Woods negotiators on international monetary arrangements to be introduced after the war. In contrast, in the 1970s current events affecting international monetary arrangements decidedly influenced the negotiating positions of the members of the Committee of Twenty. For example, once exchange rates floated early in 1973, U.S. officials wanted to try them. Moreover, after the jump in oil prices and emergence of huge payments deficits, developing members centered their efforts on the need for current balance of payments financing.

In 1944 public officials and economists of different countries agreed both on the broad objectives of economic policy and on the policies needed to achieve these objectives. Chapter 5 showed that on the domestic side there was a new commitment to full employment and that most governments agreed that, if necessary, they should use macroeconomic policies to achieve it. On the international side, after the adverse experiences of the 1930s of competitive exchange depreciation, exchange controls, protectionism, and bilateralism, most allied governments were ready to support a new era of orderly arrangements based on convertible currencies, multilateral payments, and stable exchange rates designed to create a large world market to which all countries would have equal access. In effect, there was a universal rejection of past arrangements in favor of an agreed code of conduct.

In the 1970s, officials agreed neither on economic objectives nor on policies. Some stressed controlling inflation; others stimulating employment. Some continued to believe in Keynesian policies; an increasing number strongly advocated monetarist policies. From the outset they had opposing views about the priorities to be given to different features of a reformed international monetary system.

Years of planning preceded the Bretton Woods Conference. The “White Plan” had roots dating back to 1940 and the “Keynes Plan” went back at least to the summer of 1941, and the ideas encompassed in both these plans had precedents in stabilization arrangements tried in the 1930s. Both the Keynes and White plans, moreover, went through a number of drafts before they were made public early in 1942. In 1943 the plans were reshaped, as Keynes and White and their respective colleagues exchanged views, and other plans, including those put forward by the French and by the Canadian authorities, were reviewed. U.S. officials also consulted representatives from a number of countries on the draft plans. From September 15 through October 9, 1943, as part of a broader series of meetings covering proposals for postwar international investment, commodity policy, and commercial policy, nine meetings on the monetary plans were held in Washington between a U.S. group, headed by White, and a British delegation, headed by Keynes. Out of these meetings emerged “The Joint Statement by Experts on the Establishment of an International Monetary Fund.” Even this Joint Statement went through several drafts before the final text was produced in April 1944. Then, prior to the full-scale conference at Bretton Woods, a limited but still numerous group of countries (16 plus the United States) was invited to send representatives to a preliminary drafting conference at Atlantic City in the second half of June 1944.

In the 1970s, apart from the Executive Directors’ report on reform of 1972, there were really no “plans” for reform. Only the U.S. delegation offered specific proposals.

At Bretton Woods the team of technicians was small and could make compromises and concessions that would hold. They regarded it as their duty to arrive at an agreement and determined to do so. In contrast, negotiations in the Committee of Twenty were handled by finance ministers with political considerations in mind. For many of them, compromises were difficult or impossible since they had to refer crucial questions to their heads of state or government. In effect, to some extent a struggle for political power was going on that was largely absent from Bretton Woods.

At the same time there was no one country, or small group of countries, that had sufficient leadership to influence the positions taken by other countries. At Bretton Woods, the United States and the United Kingdom had dominated the negotiations. By the 1970s not only had the role of the United Kingdom in world economic affairs been considerably reduced but the role of the United States, the single most dominant economy after World War II, had been weakened. The loss of the leadership role of the United States was due primarily to the diffusion of economic power among the large industrial nations. But confidence in U.S. leadership had been badly shaken also by the Viet Nam war and in 1973–74 by the Watergate crisis. The nine ec countries were not united enough, or ready, to take up responsibility for world leadership. The negotiations in the Committee of Twenty included full participation by representatives from many more countries than the negotiations conducted at Bretton Woods, but reconciliation of the positions taken by 20 different constituencies proved in the end impossible.

Lack of Political Will

Recalling the drive and determination of a handful of leaders in 1944 to bring about a brave new economic world, officials of developing countries complained at the Annual Meeting in Nairobi in 1973 that officials of industrial countries did not have the political will to cooperate in bringing about a reformed international monetary system. Mr. Morse himself attributed the failure of the Committee of Twenty to lack of political will.

It is certainly fair to conclude from the discussions of the Committee of Twenty that none of the officials was in a compromising mood. There was endless repetition of national positions. Some observers, citing the French proposal for negative interest charges on excess reserves, the Italian efforts at alternative proposals for indicators and asset settlement, and the apparent German willingness to agree to a link, blamed the lack of compromise on the United States. Attributing the failure to compromise mainly to the United States, however, overlooks the important fact that the United States had by far the most serious balance of payments problem and the most at stake in the negotiations, and officials of other countries were not prepared to hold earnest discussions on how the U.S. balance of payments problems might be solved, or at least mitigated, through mutual action.

In these circumstances, U.S. officials and others were inclined to experiment with the floating rate regime that had developed. Members of the U.S. Congress, as well as some high-ranking officials in the Administration, wanted to try out a period of floating the dollar in the expectation that the U.S. payments deficit might be corrected. Officials of the Federal Republic of Germany wanted to try a floating rate for the deutsche mark in the expectation that it would be easier to manage German monetary policy. Officials of other European countries also believed at the time that floating rates would enable them to follow relatively independent domestic monetary policies without concern for international repercussions.

Because of the lack of compromise on the basic issues, officials of developed countries, especially at the technical level, spent most of their time seeking mechanical ways—objective indicators, settlement systems, multicurrency intervention arrangements, substitution accounts—to ensure that international monetary arrangements were consistent with their national positions and failed to offer proposals for coming to grips with the basic economic problems of the day.

Officials of developing countries, eager to shape the world monetary system to the benefit of their own countries, concentrated on a few matters of interest only to them and on making sure they were protected from any arrangements proposed by the industrial countries.

Weakening of Governmental Authority

Another factor in the failure of the Committee of Twenty to bring about a reformed system was the relative weakening of governmental authority. The Bretton Woods system had been based on the supposition that governments could take, and enforce, decisions concerning their exchange rates and their exchange policies. The Bretton Woods Conference was held at a time when governments were exercising most pervasive control over their economies. By 1974 when the Committee of Twenty was finishing its work, however, the ability of governments to regulate the international monetary system was notably declining. A number of factors made effective control of the international monetary system by governments, or by an international agency such as the International Monetary Fund, much more difficult than before. Liquidity in the international monetary system had grown phenomenally. A worldwide network of multinational corporations and of private commercial banks had developed. Private international banking had grown exceedingly rapidly. Eurocurrency markets seemed beyond the regulations of any government. Close personal relations between bankers and business executives in different countries were made possible by the development of easy worldwide communications and travel. Instant transfers of funds were now possible because of the computerization of banking operations allowing entrepreneurs readily to switch funds from one currency to another or from one country to another when differences in interest rates, exchange rates, taxation requirements, or political situations made it profitable to do so. It was, for instance, much more difficult for officials in central banks, treasuries, or other government agencies to fix and maintain exchange rates, enforce controls on capital movements, or to run any kind of exchange control system than it had ever been before. In these circumstances, it was hard for financial officials to conceive of a reformed international monetary system subject to regulation or control or even coordinated by the international community as the Bretton Woods system had been. Paradoxically, most of the developments integrating the world economy and world financial markets were the result of the Fund’s success but not within the scope of the Fund’s jurisdiction.

Another factor relating to governmental authority also held back agreement on the reformed international monetary system. Although countries were being pushed toward ever greater economic integration by technological advances and by economic forces, national officials still wanted autonomy over their country’s economic policies. Interdependence and the desire for independence came into conflict. The reformed international monetary system as conceived by the Committee of Twenty, and earlier by officials in the Fund, was consistent with and tried to fill the needs of the economic interdependence developed by 1970. Most countries were determined, however, to retain sovereignty over their exchange rate policies, their monetary policies, their trade policies, and their policies vis-à-vis capital transactions. Thus, although the Fund had since its birth been moving in directions in which the reformed system was to go—toward greater flexibility of exchange rates, but under Fund surveillance, more initiative and pressure from the Fund to induce members to change their exchange rates and to adopt other adjustment measures, more effective consultations between members and the Fund, more management of the supply and composition of liquidity by the Fund—the world was not yet ready for the degree of international authority and management involved in the reformed system.6

Lack of Emphasis on Techniques Not a Factor

One of the reasons sometimes mentioned for the failure of the Committee of Twenty is that the members of the Bureau of the Committee did not concentrate sufficiently on technical issues or did not devise the most appropriate techniques.7 The line of reasoning is this. As seen in Chapter 13, the members of the Bureau conceived of their role as a negotiating one. They tried to help close the gap between opposing positions taken by various officials. To this end, for example, they tried to dissuade both U.S. and European officials from demanding extreme features in a reformed system. Some economists, including some of the Fund staff, however, have taken the view that had the members of the Bureau concentrated instead on getting agreement on the specific techniques to be used in a reformed system—a technique for asset settlement and a technique for currency intervention, for instance—officials might have been able to agree on these techniques. These techniques could then have been combined to form an overall system. These economists, especially those on the Fund staff, favored an approach which concentrated on techniques since that approach had been successful in the 1960s in getting agreement on the features of the SDR.

The Bureau of the Committee of Twenty unquestionably does seem to have searched for ways to obtain agreement on broad features of a reformed system while the Fund staff, for example, worked out detailed descriptions of the several techniques that we have read in earlier chapters. Nonetheless, given the circumstances described above, it seems unlikely that agreement on techniques in the reformed system would have ultimately yielded agreement on a reformed system. The difficulties that financial officials had in coming to agreement in 1975 and 1976 on techniques for resolution of the exchange rate problem, of the gold problem, and of other problems described in subsequent chapters, suggest fundamental differences in viewpoint that had to be resolved at the political rather than at the technical level. Even with political agreement for the resolution of these problems and agreement on techniques and eventual agreement on a Second Amendment to the Articles of Agreement, as described below, it was the existing system and not the reformed system that was given legal sanction.

Especially striking several years after the report on reform of 1972 and after the Committee of Twenty finished its work are the discrepancies between the plans for the reformed system and the actual circumstances at the end of 1978, the close of the period reviewed here. The Executive Directors in their 1972 report and the Committee of Twenty aimed at a fixed exchange rate system; as of the end of 1978, major currencies were continuing to float with wide fluctuations taking place. The reformers planned for a convertibility system; at the end of 1978 the dollar remained inconvertible. They worked toward an SDR standard; as of 1978 the world was still fairly much on a dollar standard. They aimed at control of global liquidity; as of 1978 the creation of greater amounts of dollar reserves and of larger amounts of liquidity was continuing. In every respect actual circumstances differed from the planned reformed system. It seems likely, therefore, that an approach relying on getting agreement on technical pieces of a system would not have brought about agreement on any of the big facets of a reformed system. There is even some question of whether the various technical pieces would have produced an operable system.

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In sum, while the conventional explanation of the failure of the Committee of Twenty is that it was “overtaken by events,” that is, by the emergence of high rates of inflation in 1973 and by the prospect of unprecedentedly large balance of payments disequilibria in international payments following the increases for oil at the end of 1973, this explanation seems by no means complete or accurate. By the time of the 1973 Annual Meeting in Nairobi, the prospect for successful negotiations was already dim. The emergence of accelerating inflation and the jump in oil prices gave the Committee an excuse for concluding negotiations that were not getting anywhere.

Given all the reasons why officials were unable to construct a reformed international monetary system in 1972–74, while their predecessors had succeeded 30 years earlier, the wonder is not the failure of 1972–74, but that the original Bretton Woods Conference was successful. It took very special circumstances to bring the Bretton Woods system and the Fund itself into being.8 Such unique circumstances plainly did not exist in the years 1972–74.


Although it did not reform the international monetary system, the Committee of Twenty represented a major and intensive effort on the part of financial officials to devise new arrangements and to reconcile opposing views. For the officials involved, the planning, drafting, meetings, informal exchange of views, and hopes for success were serious and exhilarating, as well as frustrating. These were exciting times, as there was a genuine attempt at international negotiation about a vital matter.

Despite its failure to effect reform, the Committee of Twenty served a number of positive purposes. Primarily, it provided an opportunity for officials from all Fund members to air their grievances with the former Bretton Woods system and to make proposals for what they wanted in the reformed system. Officials were able to learn firsthand the positions of their counterparts from other countries and how strongly they held these positions. This familiarity with each other’s views came at a time when international monetary arrangements were extremely fluid. Consequently, financial officials could better understand each other’s positions for the next several years as international monetary arrangements continued to evolve.

The work of the Committee of Twenty also was crucial in facilitating agreement later on pieces of the evolving international monetary system. The Outline, especially the Annexes, helped to furnish the basis for agreement on a number of points subsequently developed and incorporated into the Second Amendment of the Articles of Agreement. After the amendment went into effect, some of the features described in the Annexes, such as a substitution account, were brought up for consideration again.

In addition, the Committee of Twenty proved its usefulness as a body for policymaking in the Fund and as a forerunner to other Committees of the Board of Governors—the Interim Committee, the Development Committee, and the Council specified in the Second Amendment. Through use of these Committees, especially the Interim Committee, the policymaking machinery of the Fund was to be significantly altered.

Another significant achievement of the Committee of Twenty, as it ended its work, was turning its attention to current developments and working in conjunction with the Fund’s other bodies. After the end of the work by the Bureau and by the Committee of Twenty there was a smooth transition of the work on international monetary questions back to the Executive Board and the Fund management and staff. Within two years after being pushed out of the discussions on reform, as described in Chapter 8, by June 1974, the Executive Directors the Managing Director and staff were back in the picture, making decisions on the international monetary system that would have been impossible earlier when relations between the Fund and the United States were strained. In January 1974, the Committee of Twenty started to work on the immediate steps needed, such as guidelines for floating rates, the valuation of the SDR, and the oil facility. By June 1974, as will be shown in Part Three, the Executive Board was so thoroughly involved in these topics that it was difficult to see where the recommendations of the Committee of Twenty ended and the decisions of the Executive Board began.

Communiqué of Group of Twenty-Four, June 10, 1974; Vol. III below, pp. 636–38.

Reproduced in Vol. III below, pp. 165–96, together with the final Communiqué of the Committee of Twenty, pp. 200–205.

Reprinted in Finance & Development (Washington), September 1974, pp. 13–16.

According to Joseph Gold, the Fund’s General Counsel at the time, the Outline of Reform “would probably involve departures from the principle of uniformity if the Articles were amended to give effect to all the conclusions of the Committee.” See Joseph Gold, “Uniformity as a Legal Principle of the International Monetary Fund,” Law and Policy in International Business (Washington), Vol. 7 (1975), p. 796.

See, for example, John Williamson, The Failure of World Monetary Reform (cited in fn. 8 of Chap. 9 above), pp. 165–66.

For a description of the ways in which the Fund had gradually been evolving in the direction of the reformed system, see Margaret Garritsen de Vries, “Steadily Evolving Fund Lays Foundation Stones of the Emerging System,“ IMF Survey (Washington), Vol. 3 (September 30, 1974), pp. 305 and 307–309.

See, for example, John Williamson, The Failure of World Monetary Reform (cited in fn. 5 above), pp. 181–84.

The factors underlying the success of the Bretton Woods Conference are described in Margaret Garritsen de Vries, “40th Anniversary of Historic Conference Commemorates Birth of the Fund and Bank,” IMF Survey (Washington), Vol. 13 (July 2, 1984), pp. 193–97.

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