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IMF History (1972-1978), Volume 1
Chapter

Chapter 16. The System Starts to Evolve

Author(s):
International Monetary Fund
Published Date:
February 1996
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LATE IN 1973, about the time of the Annual Meeting in Nairobi, an atmosphere of crisis clouded international monetary affairs. It was apparent that the negotiations of the Committee of Twenty for a reformed system were not going to be fruitful. The Committee was pressing ahead to complete its work before it went out of existence, and there was no alternative high-level group of financial officials to take its place. There were wide swings in the exchange rates for the main currencies, but no international rules for exchange rates. World economic conditions were worrisome. Commodity prices were booming and primary commodities were undergoing price advances on a scale unprecedented since the Korean war two decades earlier. Speculative stockpiling of all commodities was rampant, further driving up their prices. These commodity price advances, together with expansionary policies in industrial countries, were causing inflation to accelerate worldwide. Some industrial countries were experiencing an inflation rate of 10 percent, the highest since the price boom brought on by the Korean conflict in the early 1950s. While developing countries as a group benefited from a steep increase in their export earnings, they realized that the situation was exceptional and temporary and were concerned about rapidly rising prices for their imports. This unease was evident during the 1973 Annual Meeting.

It was in this atmosphere of crisis that the Executive Directors resumed discussions that led in November and December of that year to the decisions described in the previous chapter and that the Committee of Twenty agreed to consider existing international monetary arrangements and to work out some immediate steps to be. taken in lieu of a reformed system. In December 1973, the crisis grew even more pervasive when unexpected, steep rises in the prices for crude oil were announced, adding fuel to the fires of inflation and throwing the balance of payments of all oil importing countries into unprecedented deficit. Some immediate action by the international community seemed imperative.

For these reasons officials of the Fund, including those of the Committee of Twenty, began to seek solutions for current international monetary problems that went beyond the holding actions described in Chapter 15. After months of discussion, the Executive Board took several decisions, which were endorsed by the Committee of Twenty at its final meeting on June 12–13.

The decisions of June 1974 and their endorsement by the Committee of Twenty provided a new method for valuing the SDR, raised the rate of interest on the SDR by what was then regarded as a considerable increase, made corresponding changes in the rate of remuneration and in the Fund’s charges for its drawings, set forth guidelines for floating exchange rates, made provisions for a voluntary declaration against restrictions on trade, established two new committees of the Board of Governors to succeed the Committee of Twenty, and introduced a temporary oil facility in the Fund. A few months later, in September 1974, the Executive Board decided to introduce yet another new facility in the Fund, the extended facility.

These decisions of 1974 provided the foundations for an evolving international monetary system, determining the course of the Fund’s history for the next several years. The decisions relating to the SDR, to the Fund’s charges and rate of remuneration, to the guidelines for floating rates, to the declaration against restrictions on trade, and to the new committees of the Board of Governors are described in the present chapter. The decisions relating to the oil facility and its operation are treated separately in Chapters 17 and 18. The decisions relating to the extended Fund facility and its operation through the end of 1978 form the subject of Chapter 19.

A NEW METHOD FOR VALUING THE SDR

At the Annual Meeting in Nairobi, Mr. Witteveen, looking for some subject on which the Committee of Twenty might reach agreement, suggested that it consider a new method for valuing the SDR and for determining its rate of interest. He mentioned to Anthony Barber, Governor of the Fund for the United Kingdom, that a great step forward might be made if the Committee of Twenty, at an impasse in its negotiations, could reach agreement on just one issue. The method of valuing the SDR might be that issue. Mr. Barber supported this suggestion in the meeting of ec finance ministers held during the same week as the Annual Meeting. At the meeting of the Committee of Twenty, Mr. Witteveen also put forward the idea.

Determining the method of valuation of the SDR required discussion by the Executive Board in addition to any discussions the Committee of Twenty might hold. Right after his return from the Annual Meeting, Mr. Witteveen consequently led the Executive Board in these discussions. The Executive Directors considered at length a number of techniques for valuing the SDR that the staff had worked out. Among these techniques were a “standard basket” of currencies, the technique finally adopted, an “asymmetrical basket,” an “adjustable basket,” and a “par value” technique. Other than to the standard basket, the staff and the Executive Directors gave most attention to the asymmetrical basket. This differed from the standard basket in that a decline in the value of a currency in the basket as a result of a devaluation or a downward float would not be allowed to lower the value of the SDR in terms of other currencies. For each devaluation, the number of units of the devalued currency would be increased to offset the decline in its par value. For a downward float, the number of units of the currency floating downward would be continuously adjusted; the effect of this adjustment would be the same as removing the floating currency from the basket with an offsetting increase in the amounts of the other currencies in the basket. Two other alternatives—stabilizing the SDR in terms of commodities and tying the SDR to the strongest currency in some base period—were not deliberated extensively because they had major drawbacks or were too complicated.1

Because the Executive Directors had in late 1973 debated at some length the relative merits of various techniques for valuing the SDR, they had advanced considerably in their appraisal of a more permanent method of valuing the SDR by the time the Committee of Twenty held its next meeting, in Rome, in January 1974. The Executive Board’s discussion, however, had been couched primarily in terms of a valuation of the SDR for the reformed system, that is, with an SDR valuation appropriate on the assumption that most members used stable but adjustable par values and only a few used floating rates. Since the Committee of Twenty decided in January 1974 to give up working toward a reformed system, it was necessary to agree on a method for valuing the SDR on an interim basis so that the SDR could be used as the existing system continued to emerge. The Committee of Twenty therefore agreed on a basket of currencies as the interim method of valuation for the SDR and asked the Executive Board to work out the details.

Standard Basket of Currencies

Agreement on a technique of valuation to be used while floating rates were still in use for major currencies proved relatively easy. Only the standard basket of currencies fitted these circumstances. The standard basket was based entirely on market rates of exchange so that the value of the SDR was well defined whether all currencies had effective par values, or whether a few, many, or all currencies floated. The standard basket technique could operate without the maintenance of par values but could also continue to operate if a par value system was restored.

The Executive Board took a decision on June 13, 1974 providing for an interim method for determining the value of SDRs in transactions against currencies based on a standard basket of currencies. The SDR was to be equal to a total of specified amounts of the currencies of the 16 countries that had a share in world exports of goods and services in excess of 1 percent on average over the five-year period 1968–72. The amounts of the currencies in the basket were derived from relative weights, beginning with 33 percent for the U.S. dollar—a figure selected to reflect the approximate commercial and financial importance of the dollar—and then lower percentages, broadly proportionate to the countries’ share in international transactions, for the 15 other currencies. Rule O-3 was amended to enable the Fund to use spot exchange rates in the exchange markets in London, New York, or Frankfurt as the representative rates for the determination of the equivalents in dollars of the currencies in the basket. The actual composition of the basket in terms of amounts of each currency used, shown in Table 2 below, was announced on July 1, 1974, when the new method went into effect.

Table 2.Composition of SDR Currency Basket, July 1, 1974
Amount
Weight(In units of
Currency(In percent)each currency)
U.S. dollar33.00.40
Deutsche mark12.50.38
Pound sterling9.00.045
French franc7.50.44
Japanese yen7.526.00
Canadian dollar6.00.071
Italian lira6.047.00
Netherlands guilder4.50.14
Belgian franc3.51.60
Swedish krona2.50.13
Australian dollar1.50.012
Danish krone1.50.11
Norwegian krone1.50.099
Spanish peseta1.51.10
Austrian schilling1.00.22
South African rand1.00.0082
100.0

The calculations necessary to convert the weights agreed for each currency in the basket into actual currency units were done so as to ensure that the exchange rate for the SDR in terms of any currency on Friday, June 28, 1974, the last day of the old method of valuation, was the same whether calculated by the new or the old method, thus providing a smooth transition from the one to the other. Thereafter, the value of the SDR in terms of all currencies, including the dollar, was to fluctuate from day to day in response to changes in exchange rates in exchange markets.

While the value of the SDR in terms of currencies fluctuated, the number of currencies in the basket and their proportional composition of the basket were expected to produce a reasonably stable value for the SDR in terms of a broad group of currencies; movements in the rates for some currencies were moderated or offset by movements for other currencies.2

Coincidentally the announcement of the new basket on July 1, 1974 was made 30 years to the day after the beginning of the Bretton Woods Conference, a day singled out in the original Articles of Agreement in the expression “in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944.”3

Beginning on July 1, 1974, the Fund also modified its own accounting practices in accordance with the interim valuation of the SDR. The Fund’s holdings of each member’s currency, as recorded on the Fund’s books, were to be revalued periodically on the basis of the representative exchange rates used for valuing the SDR, and the resulting currency balances to maintain the gold value of the Fund’s assets were to be settled periodically. For this purpose, the Fund subsequently established representative rates for the currencies of over 100 members.

HIGHER INTEREST ON THE SDR AND RELATED CHANGES IN REMUNERATION AND CHARGES

On June 13, 1974, following a decision by the Executive Board, the Fund announced a rise in the rate of interest on the SDR from its original 1.5 percent to 5 percent a year. The interest rate on the SDR was now to reflect changing market rates of interest. Since the value of the SDR was to be determined by the standard basket of currencies, it was logical that changes in the interest rate on the SDR be linked to changes in the interest rates on money instruments denominated in the currencies in the basket. In practice, however, members’ reserves were held and invested in only a handful of the 16 currencies in the basket. Hence, the Executive Board decided that a suitable link between the interest rate on the SDR and market rates of interest could be established by averaging the daily interest rates on the 5 currencies with the largest weights in the basket—the U.S. dollar, the deutsche mark, the pound sterling, the French franc, and the Japanese yen. The market instruments indicative of the market rates of interest for these 5 currencies were three-month U.S. Treasury bills, three-month interbank deposits in the Federal Republic of Germany, three-month U.K. Treasury bills, three-month interbank money against private paper in France, and unconditional call money in Japan. The weights to be used in calculating an average of these interest rates were to reflect the relative shares of these 5 currencies in the standard basket, namely 47 percent for the U.S. dollar, 18 percent for the deutsche mark, 13 percent for the pound sterling, and 11 percent each for the French franc and the Japanese yen.

The average money rate on these instruments in June 1974, when the 5 percent a year rate of interest for the SDR was selected, was 10 percent a year; the interest rate on the SDR was thus half the relevant market rate. The Executive Board was to review the interest rate on the SDR every six months and could, by a three-fourths majority of total voting power, change the rate.4 There was concern, however, that the Executive Board might not be able to agree on a new rate of interest and so a formula was devised that could be used in the event of disagreement. If the weighted average interest rate on the 5 currency instruments over the previous three months did not exceed 11 percent or was not less than 9 percent, the rate of 5 percent on the SDR would remain in force; if the combined average interest rate was below 9 percent, the interest rate on the SDR would be reduced below 5 percent by three fifths of the difference between the combined rate and 9 percent; in a similar manner, if the combined rate was above 11 percent, the rate of interest on the SDR would be increased by three fifths of the amount by which the combined rate exceeded 11 percent.

Ironically, although the initial staff idea of valuing the SDR in terms of currencies was based on resolving the problem of choosing an interest rate for the SDR, in the end this was not an important consideration in choosing a method for valuation. Considerations governing SDR valuation and those governing its rate of interest became separated.

The Executive Board decisions of June 13, 1974 on valuing the SDR and on the rate of interest on the SDR were considered to be of an interim nature. The Outline of Reform stated explicitly that the valuation of the SDR was to be “in present circumstances, and without prejudice to the method of valuation to be adopted in a reformed system,” the present circumstances referring to the widespread use of floating rates. The Executive Board’s decision of June 13, 1974 also contained explicit provision for review after two years of both the valuation of the SDR and its rate of interest.

These decisions of June 13, 1974 were subsequently reviewed, and the basket of currencies used in valuing the SDR was changed effective July 1, 1978. The interest rate on the SDR was also reviewed by the Executive Board several times between July 1974 and the end of 1978. These developments are taken up in Chapter 46 below.

Related Changes in Remuneration and Charges

The Articles of Agreement, as amended in 1969, related the rate of interest on the SDR to the rate of remuneration paid to members on their super gold tranche positions. The interest rate on the SDR was not to be greater than 2 percent or the rate of remuneration, whichever was higher, or smaller than 1 percent or the rate of remuneration, whichever was lower.5 The Executive Board could change the rate of remuneration, thereby permitting a change in the rate of interest on the SDR. To enable the interest rate on the SDR to become 5 percent a year, the Executive Board, on June 13, 1974, also decided to raise to 5 percent a year the rate of remuneration paid for the period July 1 to December 31, 1974. However, in order not to raise the Fund’s expenses for remuneration unduly and to avoid the need to raise the Fund’s charges to undesirably high levels, after considerable debate the Executive Directors agreed to a staff suggestion that for the next two years a lower rate of remuneration would be paid on the segment of the super gold tranche corresponding to the Fund’s holdings of a member’s currency between 75 and 50 percent of quota. This “split rate of remuneration” was to be reviewed after two years and to lapse in the absence of a further decision.

At this time, in June 1974, the Executive Board also decided to revise the schedule of charges that the Fund applied to use of its resources. The previous schedule of charges had prevailed since May 1, 1963 and, as it had been subject to only minor revisions since 1954, in practice had existed for 20 years. Charges started at zero for amounts outstanding for up to three months and then progressed from 2 percent a year for amounts outstanding from three months to one and a half years to 5 percent a year for amounts outstanding from three to five years. There was also a service charge of ½ of 1 percent a year of the amount purchased on all credit tranche purchases, and a commitment charge of ¼ of 1 percent on the amount approved under a stand-by arrangement, credited against the service charge if the stand-by arrangement was drawn upon. This schedule of charges is given in Table 3 below.

Table 3.Charges on Transactions Effected May 1, 1963–June 30, 1974
Charges in percent a year1 for period stated and for portion of holdings in excess of quota by
More than050100
But not more than (percent of quota)50100
Service charge20.50.50.5
0 to 3 months0.00.00.0
3 to 6 months2.02.02.0
½ to 1 year2.02.02.5
1 to 1½ years2.02.53.0
1½ to 2 years2.53.03.5
2 to 2½ years3.03.54.03
2½ to 3 years3.54.034.5
3 to 3½ years4.034.55.0
3½ to 4 years4.55.0
4 to 4½ years5.0

Except for service charge, which was payable once per transaction and expressed as percentage of amount of transaction.

No service charge was payable in respect of any gold tranche purchase effected after July 27, 1969.

Point at which consultation between the Fund and the member became obligatory.

Except for service charge, which was payable once per transaction and expressed as percentage of amount of transaction.

No service charge was payable in respect of any gold tranche purchase effected after July 27, 1969.

Point at which consultation between the Fund and the member became obligatory.

Since 1963 a number of developments had substantially affected the Fund’s income and operational expenses. The Fund’s facilities for use of its resources had been expanded, use of the gold tranche had been made automatic, the SDR had been created, and payment of remuneration on net creditor positions had been instituted. All these considerations, together with the sharp increases in commercial rates of interest that had taken place from 1963 to 1974, suggested that it was time for the Executive Board to undertake a thoroughgoing review of the Fund’s schedule of charges. Two other factors in the first part of 1974 also made a review of the Fund’s charges imperative. First, to enable the Fund to pay the higher rates of remuneration resulting from the increase in the rate of interest on the SDR, it was essential to raise the Fund’s charges so as not to enlarge still further the Fund’s already large budgetary deficit. Second, in order to finance the proposed oil facility (described in Chapter 17), the Fund was planning to borrow from oil exporting countries, and this borrowing was expected to be at interest rates close to market rates. The Fund’s charges on members for using the oil facility would therefore have to be closely related to the rates of interest that the Fund would have to pay to the lending countries. However, if the Fund was going to establish relatively high charges on drawings under the oil facility, it seemed it ought to raise the relatively low charges still prevailing on other drawings.

Consequently, the Executive Board decided, also on June 13, 1974, to revise the Fund’s schedule of charges on use of its regular resources. The revised schedule, to be applied to transactions effected after July 1, 1974, not only did this but also provided for two simplifications of the previous schedule. The increments in the charges were to take place on an annual rather than a semiannual basis. The charges were to be made uniformly applicable to all holdings of a member’s currency in excess of quota rather than being differentiated by the percentage by which the Fund’s holdings of a member’s currency exceeded the quota. The service and commitment charges were retained.

The revised schedule is given in Table 4.

Table 4.Charges on Transactions Effected After July 1, 1974
Charges in percent a year,1 payable on holdings in excess of quota, for period stated
Service charge0.5
Up to 1 year4.0
1 to 2 years4.5
2 to 3 years5.0
3 to 4 years5.52
4 to 5 years6.0

Except for service charge, which was payable once per transaction and expressed as percentage of amount of transaction.

Point at which consultation between the Fund and the member became obligatory.

Except for service charge, which was payable once per transaction and expressed as percentage of amount of transaction.

Point at which consultation between the Fund and the member became obligatory.

CONSIDERATION OF GUIDELINES FOR FLOATING RATES

In June 1974 the Executive Board also established guidelines for the management of floating rates, following the request of the Committee of Twenty in January 1974. The Executive Directors could legally adopt rules for floating rates and take action to see that such rules were observed without an amendment of the Articles under what was becoming called informally within the Fund the collaboration provision, Article IV, Section 4(a).

Rules Drafted by the Staff

In drafting a possible code for floating exchange rates early in 1974, the staff deemed it desirable that the central bank authorities of members with floating rates take three kinds of actions: (i) smooth out very short-run fluctuations in market rates; (ii) offer a measure of resistance to market tendencies in the slightly longer run, particularly when these tendencies were leading to unduly rapid movements in the rate; and (iii) where possible, resist and even reverse movements in market rates that appeared to be deviating substantially from any reasonable estimate of a medium-term norm. In the staff view, adherence to such a code would provide adequate safeguards not only against competitive depreciation, the most relevant concern at the time the Fund was founded, but also against “competitive non-devaluation,” a concern which arose after the middle 1960s. Competitive non-devaluation was the term used to characterize the reluctance of many members to devalue their currencies or to allow them to depreciate.

The staff also had three considerations in mind in implementing any code. First, national policies should not be subjected to greater constraints than were clearly necessary in the international interest. Second, a degree of uncertainty necessarily attended any estimate of a medium-term normal exchange rate; such uncertainty was particularly great in the circumstances of widespread inflation and unprecedented balance of payments disequilibria prevailing in 1974. On occasion, the market view of an exchange rate might be more realistic than any official view either of the country concerned or of an international body. Third, in view of the strength of short-term market forces, it might often be necessary to forgo or curtail official intervention desirable from the standpoint of maintaining exchange rate stability if this intervention involved an excessive drain on a member’s reserves or an impact on its money supply that the member found difficult to neutralize.

On the basis of this code and of these considerations, the staff drew up for the Executive Board’s review six rules for floating rates.

Rule 1 was to govern very short-run intervention. A member with a floating exchange rate should intervene in the foreign exchange market to maintain orderly conditions, that is, to prevent or moderate sharp and erratic fluctuations in the rates for its currency from day to day and from week to week.

Rule 2 was to govern short-run intervention of a somewhat longer period. A member with a floating exchange rate might intervene to moderate movements in its exchange rate from month to month and quarter to quarter and should do so when well-accepted factors, such as seasonal factors, were at work. However, a member was not to intervene aggressively, that is, was not to accumulate reserves when its exchange rate was falling or reduce them when its effective rate was rising. (The exchange rate of a country was said to be falling if the number of units of foreign currency exchanged for its currency was decreasing. It was said to be rising if the number of units was increasing.)

Rules 3 and 4 were for “stabilizing intervention.” A member with a floating rate was to endeavor to agree with the Fund on an estimate of the zone within which the medium-term norm for its exchange rate probably lay (the “normal zone”) and to adapt this estimate to changing circumstances. When the exchange rate of the member was outside the normal zone, the member was to refrain from intervening to moderate movements in its exchange rate toward the normal zone, but would be free to intervene aggressively to move the rate toward the normal zone.

Rules 5 and 6 applied to the use of balance of payments policies other than intervention that a member might use to influence its exchange rate. A member with a floating exchange rate was to refrain from introducing restrictions for balance of payments purposes on current account transactions or current payments and should progressively remove existing restrictions of this kind. A member with a floating exchange rate was also to endeavor to apply other policies affecting its balance of payments, particularly those designed to influence capital flows, in a manner consistent, insofar as the effect on its exchange rate was concerned, with the foregoing rules for intervention policies. Specifically, when the effective exchange rate was falling or was below the normal zone, the member was to be free to take measures discouraging capital outflows and encouraging capital inflows, but should not take or maintain measures having the opposite effect. Where the rate was rising or was above the normal zone, the member should be free to take measures discouraging capital inflows or encouraging outflows, but should not apply measures having the opposite effect.

Discussion of These Rules in the Executive Board

The Executive Board held more than a dozen meetings from March until mid-June to consider these rules for floating rates, and the initial staff paper went through eight revisions before the Executive Directors finally reached agreement. Prevailing circumstances help to explain why these discussions were so prolonged. The end of the discussions on reforming the system had left many questions unanswered. Hence, as of the first six months of 1974, basic questions about exchange rates were still unsettled. For example, whether fixed or floating rates were appropriate policies for members was a contested issue and European officials opposed any action by the Fund that might imply it was giving legal sanction to floating rates. When the staffs draft rules for floating rates were discussed in the Executive Board in March 1974, Jacques de Groote (Belgium) and to a greater extent Mr. Beaurain were therefore concerned that the adoption by the Fund of a code of conduct for floating rates might “institutionalize floating.” While Mr. de Groote believed that the Fund ought to devise and possibly enforce some code of conduct or rules for floating rates, Mr. Beaurain did not want the Fund to do so. Some Executive Directors also had not yet given up hope that the dollar might still become convertible. Mr. Kawaguchi, for example, preferred to avoid between members and the Fund controversial discussions about their exchange rate policies and about specifying guidelines for floating rates until the subject of asset settlement was resolved.

Executive Directors, like other financial officials, had also just been through debates in the Committee of Twenty about the use of reserve indicators in which changes in the levels of members’ reserves would be used to judge the need for exchange rate adjustments. Consequently, when the staff proposed that changes in reserves be one of the criteria used in the rules for managing floating rates, Messrs. Kawaguchi and Schleiminger were especially adamant in their rejection of reserve criteria. The Executive Directors had likewise just been through extensive debates in the Committee of Twenty about whether or not capital movements ought to be restrained by controls and had not reached a consensus. Hence, they found it difficult to agree on the function of capital controls in influencing the course of floating exchange rates.

Not only did the prevailing circumstances make agreement on rules for floating rates among the Executive Directors difficult but so did many of the concepts involved in the staff’s draft code and the fear that the Fund might be extending its authority too far. To remove the mandatory tone of terms like “rules” for floating of rates, or a “code of conduct,” and to make it clear that they might be altered from time to time, all Executive Directors preferred the phrase “guidelines for the management of floating rates.” Mr. Brand was concerned that the Fund would be entering into discussions with members about their reserve policies, which would compromise the freedom of members to use their reserve currency holdings as they wished. Many Executive Directors were concerned about how such concepts as “normal zones” or “medium-term norms” for exchange rates were to be determined and whether the Fund and members would be able to agree on what constituted normal zones for exchange rates. Many Executive Directors also questioned whether members could be asked to direct their policies toward the attainment of normal zones and whether the Fund was asking, in effect, for surveillance over the whole range of a member’s balance of payments policies. A number wondered even how changes in exchange rates could be measured in circumstances in which the rates for several currencies were changing concurrently. Because of these misgivings, Messrs. Brand, Bryce, Prasad, and Schneider, among others, considered the staff’s recommendations overambitious. In contrast, others, including Knut J.M. Andreassen (Norway), Mr. Massad, H.R. Monday, Jr. (The Gambia), and Mr. Palamenghi-Crispi, believed that the staff’s suggestions were not sufficiently strong as to make any difference to the policies that the major members were likely to be pursuing anyway.

Executive Directors from the large industrial members using floating rates were understandably most concerned with the precise way in which any rules, or guidelines, would be applied to their countries. Mr. Cross, appointed Executive Director for the United States only a few weeks earlier and a participant in many meetings of the Committee of Twenty in which the desirability of floating rates as against fixed rates had been acrimoniously debated, emphasized that U.S. officials favored floating rates precisely because floating permitted greater exchange flexibility for the dollar than had been possible under the par value system. He was concerned that U.S. officials might find themselves again in a position of having relatively little freedom in exchange rate policy, while other members were fairly free. Such a situation could arise, he explained, if a member whose currency was used as an intervention currency was frustrated from floating by the intervention policies of other members. Yet, the rules or guidelines for floating rates mainly involved policies for intervention.

Mr. Bryce, pointing out the long Canadian experience with floating, believed that the staff paper was largely normative (that is, dealing with standards to be attained) and did not come to grips with the practical problems actually confronting central bank authorities in the management of exchange markets. He preferred a discussion of the actual experiences of individual countries with floating rates to a discussion of rules or guidelines for floating. Mr. Bryce believed that the particular rules suggested by the staff, stated in terms of norms or agreed zones or targets, were also unrealistic. Exchange rate targets or the objectives and commitments of the central bank authorities would have to be known to those who operated in the market; yet such knowledge would give operators a clear advantage if they believed that the authorities could not meet their objectives. In addition, like Mr. Cross, Mr. Bryce stressed that use of targets or zones and advance commitments to the Fund would run contrary to the very objective of floating, to allow exchange markets to determine exchange rates.

GUIDELINES FOR FLOATING RATES DECIDED

Despite the stance of some Executive Directors which made agreement on any guidelines difficult, the Executive Directors finally reached a decision, mainly because they knew they had to. The deputies of the Committee of Twenty at their eleventh meeting in Paris on May 7–9, 1974 had made it clear that they expected a detailed text on guidelines for the management of floating rates agreed by the Executive Directors for presentation to the Committee of Twenty in June. Agreement was also facilitated because Messrs. Bull, de Groote, and Kafka emphasized that any guidelines would inevitably have to be applied in a flexible and experimental manner and made strong appeals to their colleagues to come up with agreed guidelines. Also, the Executive Directors were willing to meet time and again to clarify points and to suggest alternative phrasing and wording on which they could all agree.

Elements of the Decision

On June 13, 1974 the Executive Board took a decision agreeing to a lengthy memorandum which set forth and explained “Guidelines for the Management of Floating Exchange Rates.”6 The memorandum contained an introduction explaining the basis on which the Fund was issuing such guidelines, that is, widespread agreement that exchange rates were a matter of international concern and a matter for consultation and surveillance by the Fund and that members were legally obliged to collaborate with the Fund on their exchange rate policy. This introduction also set forth the assumptions on which the guidelines were based and the considerations taken into account. These assumptions and considerations had been stated in the original staff paper. At the same time, it was essential to recognize that national policies were not to be unduly constrained, that there was considerable uncertainty with regard to what might be normal exchange rates, and that members might not be able to intervene in accordance with the guidelines if the required intervention affected their reserves or money supply unduly adversely.

Six guidelines were set forth, together with commentary on them. While in some respects they were similar to the rules drafted by the staff, they clearly revealed the Executive Board’s preference for guidelines that gave members considerable latitude. For example, the introduction of target zones, a main feature of the staff’s rules, was eliminated. Other guidelines were couched in more general language than that suggested by the staff. A member with a floating exchange rate was to intervene to prevent or moderate sharp and disruptive daily or weekly fluctuations, and might act, through intervention or otherwise, to moderate monthly or quarterly movements. Indeed, when temporary factors were involved, the member was encouraged to do so. But a member was not normally to act “aggressively,” that is, the member should not so act as to depress its exchange rate when it was falling or to enhance the rate when it was rising.

Moreover, if a member with a floating rate wanted to bring its exchange rate within, or closer to, some target zone of rates, it was to consult with the Fund about the target. If the Fund considered the target rate reasonable, the member would be free to act aggressively to move its rate in that direction. If the exchange rate of a member with a floating rate moved outside what the Fund considered the range of reasonable norms to an extent that the Fund considered likely to harm other members, the Fund was to consult with the member.

Furthermore, a member with a floating exchange rate was to be encouraged to discuss with the Fund its broad objective for the development of its reserves. If the Fund considered this objective reasonable, the member was to be encouraged to follow certain exchange rate policies. A member with a floating rate, like other members, was also to refrain from introducing restrictions for balance of payments purposes on current account transactions.

The guidelines were to be reviewed from time to time and adjusted as appropriate.

Implementing the Guidelines

In the months after June 1974, the staff held internal discussions on how to implement the guidelines. Decisions were needed, for instance, on how to classify members with respect to their exchange rate regimes, on what statistical and qualitative information to request of members, and how to proceed in the special consultations on exchange rates. Staff members did not hold unanimous views. Some were ready to talk to officials of members about normal or target exchange rates, while others wanted the Fund to proceed extremely cautiously, working primarily toward developing closer contact with officials of members with regard to exchange rate policy, but not pressing them toward particular exchange rates.

Early in 1975 the staff recommended to the Executive Board procedures for implementing the guidelines, but most Executive Directors did not like the recommendations. Messrs. Cross, Gerard de Margerie (France), Kafka, Palamenghi-Crispi, Rawlinson, and George Reynolds (Ireland) argued that the Fund should not treat members with floating currencies differently from members with pegged currencies; there should be equal surveillance of all members. Mr. Reynolds objected that, under the recommended procedures, members with floating currencies would be asked to provide the Fund with more information than members whose currencies were not floating, to submit to more consultations with the Fund than other members, and to submit to Executive Board scrutiny on the basis of concepts, such as effective exchange rates, which they regarded as of doubtful value. On the other hand, Per Åsbrink (Sweden) and Messrs. Kharmawan and Lieftinck believed that the Fund should in one way or another exercise surveillance over exchange rates and the balance of payments adjustment process.

No Executive Board decision was taken, and the Managing Director considered it unproductive to push for one. Meanwhile, the staff, mainly in the five Area Departments, working with individual Executive Directors and with officials of members in conjunction with the special consultations, tried to keep alive interest in these guidelines.

DECLARATION ON TRADE

In its Communiqué after its last meeting in June 1974, the Committee of Twenty listed as an immediate step to assist the functioning of the international monetary system a provision for members to pledge themselves on a voluntary basis not to introduce or intensify “trade or other current account measures” without a finding by the Fund that there was balance of payments justification for such measures. To make this invitation more specific, Part II, Immediate Steps, of the Outline of Reform contained an appendix specifying this declaration on trade measures.7

As a follow-up, the Executive Board took a decision on June 26, 1974, concurring in the transmission to members of a letter from the Managing Director requesting that members inform the Fund whether they subscribed to the declaration.8 In subscribing to the declaration a member was to represent that, in addition to observing its obligations with respect to payments restrictions under the Articles of Agreement, it would not on its own discretionary authority introduce or intensify trade or other current account measures for balance of payments purposes that were subject to the jurisdiction of the gatt or recommend them to its legislature without a prior finding by the Fund that there was a balance of payments justification for such measures. The declaration was to become effective among subscribing members when members having 65 percent of the total voting power in the Fund had accepted it and, unless renewed, was to expire two years from the date on which it became effective.

NEW COMMITTEES OF THE BOARD OF GOVERNORS

In September 1974 the Executive Board also took decisions approving draft resolutions for approval by the Board of Governors establishing an Interim Committee of the Board of Governors on the International Monetary System and a Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (commonly referred to as the Development Committee). At its meeting in June 1974, the Committee of Twenty had agreed to these changes in the structure of the Fund. These draft resolutions were approved, together with a resolution ending the Committee of Twenty, in a composite resolution by the Board of Governors at the Twenty-Ninth Annual Meeting in early October 1974.9 As of October 2, 1974, the Committee of Twenty thereby ceased to exist and the Interim Committee and the Development Committee came into being. These Committees were both structured along the lines of the Committee of Twenty. The 20 members of the Interim Committee were to be Governors of the Fund, ministers, or others of comparable rank. Each member of the Fund that appointed an Executive Director and group of members that elected an Executive Director was entitled to appoint one member and up to seven associates. Executive Directors, or in their absence their Alternates, were entitled to attend the meetings of the Committee, and the Managing Director was entitled to participate in the meetings. The Committee was expected to last only until the Articles of Agreement were amended when provision would be made for a permanent Council of Governors. This accounts for its title of Interim Committee. Mr. Witteveen had suggested that, pending establishment of a Council with decision-making powers, an Interim Committee be created with an advisory role and with the same composition and procedures as the proposed Council. The issue of how to revamp the Executive Board of the Fund or to change the Fund’s structure, which had been on the original agenda of the Committee of Twenty, was thereby abandoned.

The Development Committee was also made up of 20 persons who were to be Governors of the World Bank, Governors of the Fund, ministers, or others of comparable rank, appointed alternately for a term of two years by members of the World Bank and members of the Fund. There could be up to seven associates for each member on the Committee. The Executive Directors of the Fund and the World Bank, or in their absence their Alternates, as well as the President of the World Bank and the Managing Director of the Fund, were entitled to participate in meetings. (The terms of reference of the Interim Committee and the Development Committee are described in Chapter 50.)

The evolving system was beginning to take shape.

The alternative methods of valuing the SDR that were considered in the Fund in 1973–74 are explained in J.J. Polak, Valuation and Rate of Interest on the SDR, IMF Pamphlet Series, No. 18 (Washington: International Monetary Fund, 1974), especially pp. 12–16. The various baskets of currencies that could be used for valuation of the SDR are also described in Annex 9 of the Outline of Reform, Vol. III below, pp. 193–94.

How the Fund calculated the value of the SDR each day using the basket of 16 currencies was described in IMF Survey (Washington), Vol. 3 (July 22, 1974), p. 235, and ibid., Vol. 4 (September 15, 1975), p. 280; and by David S. Cutler and Dhruba Gupta in “SDRs: Valuation and Interest Rate/’ Finance & Development (Washington), Vol. 11 (December 1974), pp. 18–21.

Original Articles of Agreement, Article IV, Section 1(a). These Articles are in History, 1945–65, Vol. III, pp. 185–214. Article IV, Section 1(a) is on p. 189.

Total voting power refers to the votes of all members of the Fund at a given time. This total may exceed the number of votes that can be cast in the Executive Board at that time because, on occasion, a few members have not participated in the election of an Executive Director. Hence, there has not been an Executive Director to cast the votes of these members.

Article XXVI, Section 3 in History 1966–71, Vol. II, pp. 127–28.

The decision and the attached memorandum—E.B. Decision No. 4232-(74/67)—are in Vol. III below, p. 487.

Communiqué of Committee of Twenty, June 13, 1974, par. 3(e) and Outline of Reform, Vol. III below, pp. 201, 176–77.

E.B. Decision No. 4254-(74/75). This decision and the Managing Director’s letter to members are in Vol. III below, pp. 554–55.

Resolutions Nos. 29–7, 29–8, 29–9, and 29–10; Vol. III below, pp. 208, 213–15, 575–78, 208–210.

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