THE QUESTION HAS BEEN RAISED what effect transactions with the International Monetary Fund have on the monetary situation within a country when the foreign exchange purchased from the Fund is used to meet a balance of payments deficit. The fear has been expressed that, at least in some countries, the national currency counterpart of the resources obtained from the Fund may be used to prolong the inflation which has caused the payments deficit.
There are various technical arrangements in force in different countries for dealing with the national currency derived from the sale of foreign exchange acquired from the Fund. In some countries, the national currency counterpart is kept on deposit to the credit of the Fund at the central bank. In other countries, the government substitutes a noninterest-bearing note for the national currency counterpart of a transaction with the Fund. It is with the effects of the latter practice that this paper is primarily concerned.
This paper was prepared by the Research and Statistics Department for the information of the Board of Executive Directors.
See, for example, John H. Williams, Postwar Monetary Plans and Other Essays (New York, 1945 and 1947), pp. 8–10.
It makes no difference whether the central bank’s liabilities to the Fund are in the form of a deposit or of noninterest-bearing notes of the central bank. In fact, no country has substituted such notes of the central bank for the national currency counterpart of a drawing on the Fund.
This paper does not discuss the monetary effects of the techniques used by members to acquire the gold or convertible currencies to meet their repurchase obligations to the Fund. It should be noted, however, that if a government substitutes its noninterest-bearing notes for the national currency counterpart of a drawing on the Fund and uses the proceeds to finance expenditures or to retire debt, it will be confronted with a “financing problem” when it must undertake a repurchase of its own currency with part of the increase in its monetary reserves. To acquire the gold or convertible currencies for the repurchase, the government would then either have to use part of a budgetary surplus (which it may not have) or have to borrow from the public or the central bank (which it may not be able to do).
If the Exchange Equalization Account uses the national currency it acquires from the sale of exchange drawn from the Fund to buy treasury bills in the market, the effect on the money supply will be the same as if the government repaid debt to the public.
In a country like the United States or the United Kingdom, a balance of payments deficit may not reduce the reserves of the banking system. Thus, if countries that acquire dollars or sterling add these currencies to their reserves by holding additional deposits in commercial banks or by investing the funds in treasury bills or other securities, the liquidity of the banking system in the reserve center will be restored. There may be no secondary contraction of credit, and there may not even be a reduction in the money supply. Monetary policy in a country acting as a reserve center must take into account the manner in which foreign balances are held and used.