THE PRESENT PAPER is intended to indicate to what extent the International Monetary Fund, with its present policies and practices or with some modification of those policies and practices, is capable of dealing satisfactorily with certain problems of international liquidity described in the following sections. Throughout the discussion, the attempt is made to secure any given result with the minimum adaptation of present arrangements; but it has not been assumed that the Articles of Agreement of the Fund are incapable of amendment in cases where they would appear to impose an inescapable legal obstacle to useful developments. No assumption has been made as to whether action affecting the supply of international liquidity is now, or may soon become, desirable. The only question raised is whether and how such action, if it did become necessary, could be undertaken through the Fund, under either the existing or amended provisions of the Articles. The discussion of a particular course of action in this paper does not necessarily imply that it could be adopted without amendment of the Articles.1


THE PRESENT PAPER is intended to indicate to what extent the International Monetary Fund, with its present policies and practices or with some modification of those policies and practices, is capable of dealing satisfactorily with certain problems of international liquidity described in the following sections. Throughout the discussion, the attempt is made to secure any given result with the minimum adaptation of present arrangements; but it has not been assumed that the Articles of Agreement of the Fund are incapable of amendment in cases where they would appear to impose an inescapable legal obstacle to useful developments. No assumption has been made as to whether action affecting the supply of international liquidity is now, or may soon become, desirable. The only question raised is whether and how such action, if it did become necessary, could be undertaken through the Fund, under either the existing or amended provisions of the Articles. The discussion of a particular course of action in this paper does not necessarily imply that it could be adopted without amendment of the Articles.1

J. Marcus Fleming*

Nature and Types of International Liquidity

International liquidity consists essentially in the resources available to national monetary authorities to finance potential balance of payments deficits, i.e., in their command over compensatory official financing. It may consist in the possession of assets or in the ability to borrow internationally. Typical items entering into international liquidity are holdings of gold and convertible foreign exchange; but claims on international institutions or entitlements to borrow from international institutions, from foreign governments, or even from private sources abroad, may be included in the concept. Not only may international liquidity take various forms, but it may be of various qualities, so that it cannot be unambiguously measured even for a single country.

An important distinction must be drawn between assets or borrowing facilities that place financing unconditionally at the disposal of the possessing government, and those that confer only a possibility of obtaining financing, subject to conditions. There are three important types of conditions: (a) those relating to circumstances with which the country using the liquidity is confronted, (b) those relating to policies which that country should pursue, and (c) those relating to the period for which the liquidity may be used, i.e., the period for which the financing is made available. Type (a) is exemplified by the stipulation contained in the Articles of Agreement of the International Monetary Fund that countries may draw from the Fund only currencies which are “presently needed for making in that currency payments which are consistent with the provisions of this Agreement.”2 Type (b) is exemplified by the tranche policies of the Fund, under which requests for transactions in the higher credit tranches are likely to be favorably received only “when the drawings or stand-by arrangements are intended to support a sound program aimed at establishing or maintaining the enduring stability of the member’s currency at a realistic rate of exchange.”3 Type (c) is exemplified by the repurchase provisions of the Fund Articles,4 and by the policy requiring drawings to be repaid within three to five years, at the outside.5 Liquidity that is conditional in any of these senses may be somewhat less prized by the country possessing it than would be an equivalent amount of unconditional liquidity; but the imposition of such conditions may be for the general advantage of the international community, and may make countries having surpluses in their balances of payments readier to provide, or to facilitate the provision of, additional liquidity.

In what follows, “conditional liquidity,” when referred to without further qualification, means liquidity subject to conditions of type (b)—“policy conditionally”—and the main contrast will be between unconditional liquidity and liquidity that is conditional in this sense.

Criteria of Need for International Liquidity

Any increase in the supply of liquidity—particularly unconditional liquidity—since it facilitates the financing of payments deficits, is likely to result in an increase in the magnitude or duration of such deficits.6 There will be milder or slower resort to methods—such as exchange rate adjustment, the use of restrictions on imports or capital exports, and the application of deflationary internal financial policies—whereby these deficits would otherwise have been reduced or eliminated. In itself, any diminution in the use of restrictions, particularly restrictions on current transactions, may be considered desirable, and the same is true of any decline in the necessity for applying policies that result in unemployment and setbacks to economic growth. On the other hand, an expansion in liquidity can be considered undesirable to the extent that it gives rise to, or perpetuates, inflation, or leads to the obstinate retention of too favorable rates of exchange. Any given increase in international liquidity of the unconditional variety may have good results in some countries and bad results in others. This makes it more difficult not only to judge what “the need” for international liquidity is, but also to obtain a consensus among the different countries of the world that any given expansion or contraction of liquidity is in fact desirable.

An increased supply of the type of liquidity of which the use is subject to policy conditions will have somewhat different results. While it will probably increase the amount and the financing of external deficits, even this is not certain. It will not so much reduce recourse to other measures of dealing with disequilibria as alter, presumably for the better, the nature of the measures taken. If this type of liquidity is wisely administered, there can, in principle, scarcely be too much of it available, although there is, of course, a limit to the amount that can appropriately be used. The fact that, in practice, liquidity subject to conditions tends to take the form of short-term to medium-term drawing or borrowing facilities7 makes this limit narrower than would otherwise be the case.

The various types of liquidity are to some extent substitutes for each other. The need for unconditional liquidity will therefore be the less, the greater is the amount of conditional liquidity that is available. The advantages of conditional liquidity from an international standpoint would appear to make it desirable in principle to ensure that the need for such liquidity is fully met before assessing and meeting the residual need for unconditional reserves. There are, however, limits to the extent to which conditional liquidity will be accepted by countries as a satisfactory substitute for unconditional liquidity.

Despite considerable divergence of views as to the present adequacy of international liquidity, it would probably be widely agreed (1) that over the longer run, in the absence of coordinated international action, the rate of growth of international liquidity, both conditional and unconditional, may become inadequate to meet the growing needs; (2) that situations may arise in which it is desirable to vary substantially the amount and distribution of international liquidity; and (3) that the potential instability of the system under which reserves are held in the form of foreign exchange on a purely voluntary basis may make it necessary to take steps at some time or another to avert the danger of a running down of official holdings of reserve currencies, or to provide an alternative holder for such currencies. The present paper considers to what extent the Fund would be in a position, or might be enabled, to deal with these contingencies, if they should arise.

Types of Liquidity Arising from Fund Positions and Operations

Members of the Fund, as such, possess liquidity of different kinds, in amounts that depend primarily on the size of their quotas, on their IMF positions,8 and on whether or not they have a stand-by arrangement with the Fund. All drawings are subject to a small transactions charge of ½ of 1 per cent, and on drawings beyond the gold tranche interest is paid varying with the amount of the drawings and the length of time for which they have been outstanding. Under present policies, a member is entitled to receive the overwhelming benefit of the doubt for any drawing not exceeding its gold tranche position. The liquidity that such a drawing confers is therefore almost as free from burdensome conditions as that resulting from the possession of gold or foreign exchange reserves. Such drawings, however, are still subject to the conditions that the member must be eligible to draw from the Fund and that the currency required must be needed for making payments consistent with the provisions of the Agreement. Though the “overwhelming benefit of the doubt” applies also to this statutory proviso, there is an obligation on members to respect it. Broadly speaking, this implies that a member should not draw from the Fund except to meet a deficit or threat of a deficit—not, surely, a significant limitation on the usefulness of the drawing right in question. Drawings within a member’s net creditor position are not subject to any repurchase obligation. Drawings within the rest of the gold tranche are subject both to the obligations under Article V, Section 7 (b), and to the obligations to repay within three years9 or within a three-year to five-year period,10 which are undertaken or imposed as a matter of Fund policy. Within the gold tranche, however, the force of these repurchase obligations is weakened by the ease with which new drawings can be made, subject to payment of the small transactions charge, under the “overwhelming benefit of the doubt” policy.

Drawings or stand-by arrangements beyond the gold tranche require a degree of justification that increases with the amount of drawings outstanding. The power to draw within the credit tranches therefore confers upon a member a type of liquidity that is subject in varying degrees to policy conditions. There is no fixed limit to the amount of conditional liquidity that a member may obtain in this way. However, without a special waiver, a member cannot draw within the credit tranches more than a sum equivalent to its quota, i.e., it cannot draw beyond the point at which the Fund is holding an amount of its currency equal to twice its quota.11 Until recently, this has been taken as the practical limit to the amount of a member’s drawing facilities, and hence to the amount of conditional liquidity available to it through the Fund. A new facility providing financing to compensate for export fluctuations, however, makes it likely that this limit will be exceeded from time to time in appropriate circumstances. The export compensatory financing facility itself provides a type of conditional liquidity, normally not exceeding 25 per cent of quota—one conditional, however, more upon the presence of certain circumstances (the occurrence of a shortfall in exports) than upon the adoption of appropriate policies by the drawing country. Since export compensatory drawings can be made even when the Fund’s holdings on account of other drawings have reached twice the member’s quota, and since the limit on other drawings is to be waived to the extent that drawings within the special compensatory tranche are still outstanding, the practical limit on total drawings within the credit tranches may now be equivalent to 125 per cent, rather than 100 per cent, of quota.

Drawings under stand-by arrangements may be either free from policy conditions or subject to rather precise conditions, according to the terms agreed when the arrangement was granted. Stand-by arrangements themselves, however, are granted on the same general conditions as drawings within the tranche which would be reached if the arrangements were fully drawn upon.

Members not only have a claim that the Fund will in certain circumstances add to its holdings of their currencies, i.e., will permit them to draw; they also have an obligation, in other circumstances, to enable the Fund to reduce its holdings of their currencies. If they have drawn, they will have repurchase obligations. Even—and especially—if they have no drawings outstanding, they are liable to have their currencies drawn upon by other members. These obligations could constitute a liquidity hazard for the country in question. Where repurchase obligations arise under Article V, Section 7(b)—which provides, inter alia, for repayment more or less pari passu with the recovery in reserves—this hazard is nominal. Other repurchase commitments, setting a maximum period within which repayment is to be made, may make the hazard material. The liability of members to have their currencies drawn upon by other members—within the limits set by the Fund’s holdings of their currencies—could be inconvenient to the members in question, were it not that (1) the Fund provides guidance to drawing members regarding the currencies to be drawn with a view to avoiding the drawing of currencies that are in a weak position, and (2) as explained below, a member whose currency is drawn is compensated for any loss in other reserves by an enhancement of its Fund drawing facilities, usually in the form of highly liquid drawing facilities in the gold tranche.

There is, at first sight, a certain tension, or tendency to incompatibility, between the Fund’s policy of making members’ gold tranche positions liquid by enabling their possessors to draw them down freely, and its need to be able to add where necessary to the amount of such positions held by countries whose currencies are required for drawings. This tension, however, is largely resolved by three factors. First, even gold tranche drawing rights do not entitle a country to draw unless it needs to do so to meet a payments problem. Second, the transactions charge, though small, tends to discourage drawings of a frivolous character. Finally, the Fund’s policy regarding the currencies to be drawn is designed to secure an equitable and acceptable distribution of gold tranche positions.

It should be noted that all members’ rights and obligations vis-à-vis the Fund—the size of quotas, of drawing facilities, of repurchase obligations, etc.—are fixed in terms of gold; their gold value is unaffected by exchange rate adjustments with the possible exception of a (theoretically conceivable but practically quite unlikely) uniform change in par values.12 The fact that gold tranche positions possess a constant value in terms of gold, as well as being able to be freely drawn upon, renders them, objectively, a good substitute for gold reserves.

When a member country draws from the Fund, it obtains the currency of another member in exchange for its own currency. How does this operation affect the level and distribution of international liquidity, both conditional and unconditional? The answer to this question is complex and is conveniently given in stages.

Take, first, the effect on liquidity derived from IMF positions. As we have seen, insofar as the member draws within the gold tranche, it forfeits a corresponding amount of quasi-unconditional liquidity in the Fund. Insofar as it draws beyond the gold tranche, however, it uses up conditional drawing facilities. The member whose currency is drawn, on the other hand, improves its position in the Fund. As a rule, such a country will already have a gold tranche position, and the improvement in its IMF position will constitute an increase in quasi-unconditional liquidity. Most Fund drawings nowadays are in the credit tranches rather than in the gold tranche, and the effect of such a drawing, as far as IMF positions are concerned, will normally be (a) to increase quasi-unconditional liquidity and (b) to reduce conditional liquidity.

In order to arrive at the effect on the amount and distribution of liquidity in all forms, however, we have to take account of the repercussions of drawings on countries’ owned reserves of gold and foreign exchange. Here again we proceed by stages, and assume first that changes in reserve holdings are composed of gold and foreign exchange in the same proportions in each of the countries affected. Now, as a result of the drawing, the drawing country will be in a position either to increase its reserves or to finance an increased deficit. There will therefore be a rise in owned reserves either in the drawing country or in the countries from which it imports, and the currency drawn will be converted partly into gold and partly into reserve currencies. The country whose currency is drawn will experience a decline in reserves of equal magnitude, again partly in gold and partly in reserve currencies. There will (on the hypothesis adopted) be no change in aggregate holdings of reserve currencies and thus no change in aggregate owned reserves. The country whose currency has been drawn (the drawee country) will probably have approximately the same amount of unconditional liquidity as before, but its composition will be changed: it will experience an increase in its gold tranche position in the Fund and a reduction in owned reserves. The drawing country or its suppliers (taken together) will have more unconditional liquidity, in the form of gold and foreign exchange, and less drawing facilities (probably of a conditional character) in the Fund.

However, we must take account of the fact that the countries concerned do not necessarily have the same marginal propensity to hold foreign exchange in their reserves. If, for example, the drawing country (and most of its suppliers) has a high marginal propensity while the country whose currency is drawn has a low marginal propensity, the drawing will probably result in some increase in aggregate holdings of reserve currencies and hence in the total of gold and foreign exchange reserves.13 The drawing in question is thus likely to result in a twofold increase in unconditional liquidity: (a) in the form of gold tranche positions and (b) in the form of foreign exchange reserves. This increase in unconditional liquidity will accrue to the drawing country and/or its supplying countries and to reserve currency countries. If, on the other hand, a country with a low marginal propensity to hold foreign exchange in its reserves should draw on a country with a high marginal propensity, the opposite result would be likely to ensue, viz., a decline in the holding of foreign exchange reserves, constituting a partial offset to the increase in unconditional liquidity in the form of gold tranche positions. The owned reserves of drawing and/or supplying countries will rise. Those of reserve currency countries will decline.

Either the drawing country, or the drawee country, or one of the suppliers of the latter, may itself be a reserve currency country. Such countries tend typically—though not inevitably—to effect their reserve changes largely or exclusively in gold. Their marginal propensity to hold foreign exchange in reserves is very low. Thus, any drawing of a reserve currency from the Fund is likely to result in a rise in the holding of reserve currencies, including that of the drawee country. That country may even gain more unconditional liquidity qua reserve currency country than it loses qua drawee; in this case, the rise in its quasi-automatic drawing rights will be only partially offset by a decline in its owned reserves.

Repayments of drawings (i.e., repurchases) have the opposite effects on countries’ liquidity to those produced by drawings. Repurchases normally reduce gold tranche positions while restoring conditional drawing facilities, and may have analogous effects (in reverse) on the holding of foreign exchange reserves to those discussed for drawings.

Broadly speaking, we may say that a Fund drawing not only serves currently to finance a deficit by providing liquidity to a country that has immediate need of it, but also—if it is a drawing in the credit tranches—adds to the aggregate amount of liquidity available in unconditional form. It thus increases the ease of financing potential future deficits. Assuming that the Fund’s drawing policies remain unchanged, the total of outstanding drawings is likely to increase at times when payments disequilibria are particularly large and frequent. At such times the need for liquidity is greater, and it is not inappropriate that Fund transactions arising in response to this need will generate additional liquidity.

Ways of Influencing International Liquidity Through Changes in Fund’s Readiness to Provide Financing

Let us now consider various methods by which the amounts of unconditional and of conditional liquidity, respectively, can be increased through the Fund.

Increases in Quotas14

Increases in quotas in the Fund have a dual aspect. They increase the drawing facilities afforded by the Fund to its members—assuming no change in the Fund’s policies governing drawings—and they simultaneously increase the resources available to the Fund to meet the drawing requirements of members. They thus affect the liquidity both of Fund members and of the Fund itself.

The immediate effect on the external liquidity of members is complex, but on balance expansionary. Twenty-five per cent of any increase in quotas has normally to be paid in gold and the rest in domestic currency. The subscribing member’s owned reserves are, of course, reduced by the payment of gold. In return, however, the member’s potential drawing facilities increase by at least 125 per cent of the addition to its quota.15 Where the member, just before the increase in its quota, has no drawings outstanding beyond its former gold tranche, one fifth of the additional facilities—equivalent to 25 per cent of the addition to its quota—will consist of quasi-automatic drawing rights in the gold tranche, and the member will suffer virtually no decline in unconditional liquidity. Where, however, the member has previously drawn beyond the gold tranche, less than one fifth, if any, of the additional drawing facilities will be in the gold tranche and the member will suffer some decline in unconditional liquidity. Moreover, in either case, to the extent that the member finds the gold for its subscription, not out of its own holdings but by converting foreign exchange reserves, there will be a secondary loss of gold reserves in the reserve currency countries. On the other hand, conditional liquidity in the form of drawing facilities in the credit tranches will be increased by an amount lying between 100 and 125 per cent of the addition to member quotas—an increase which, for most members, is much more important than the deterioration in the composition, or decline in the amount, of their unconditional liquidity.

The foregoing discussion of the effects of quota increases on liquidity has proceeded on the assumptions that quasi-automatic drawing rights are available only to the extent of gold tranche positions, and that the acquisition of gold by the Fund in subscriptions is neither reduced under Article III, Section 4(a), nor offset by the use of gold owned by the Fund to acquire currencies or investments. The effects of removing these assumptions are discussed later in this paper.

So much for immediate effects. In the longer run it may be assumed that, with unchanged drawing policies, outstanding drawings in the credit tranches will come to represent as great, or almost as great, a proportion of the enhanced quotas as, in the absence of the quota increase, they would have represented of the old quotas.16 When this adjustment has been accomplished, gold tranche positions will have increased in much the same proportion as quotas, and the increase in such positions will exceed the gold subscriptions associated with the increase in quotas. Nevertheless, as long as quasi-automatic drawing rights are confined to the gold tranche, it is very doubtful whether quota increases, even in the longer run, make any significant net contribution to the expansion of unconditional liquidity.

If, provisionally, one ignores any effect which the transfer of gold to the Fund may have on the amount of foreign exchange that members are willing to hold in their reserves, the Fund’s net contribution to unconditional liquidity up to any point of time can be measured by the amount of members’ gold tranche positions less the amount of gold held by the Fund. At the end of 1963, the net contribution, thus measured, amounted to some $1600 million. Of this amount, $800 million was attributable to the fact that between 1956 and 1960 the Fund invested that amount of its gold in U.S. securities. The remaining $800 million, reflecting the Fund’s ordinary transactions, particularly the amount of outstanding drawings in the credit tranches,17 represented some 5½ per cent of member quotas. This figure has varied between 3 per cent and 8 per cent of quotas during the past decade. If, now, one takes account of the indirect effect of the net transfer of gold by members to the Fund in reducing members’ holdings of reserve currencies, and assumes that one fourth of the gold so transferred18 was obtained by the conversion of reserve currencies, it would appear that the consequential reduction in foreign exchange reserves, and hence in total owned reserves, may have amounted to some 4 per cent of total quotas. It will be seen that any net contribution of the Fund to unconditional liquidity as a result of ordinary transactions has thus far been insignificant.

As long as additions to Fund quotas keep pace roughly with the rising demand to use the Fund’s drawing facilities and as long as present drawing policies and repurchase arrangements remain unchanged, there is no reason why there should be any great change in the average proportion that outstanding drawings in the credit tranches bear to quotas; under these conditions, quota expansion must be regarded almost exclusively as a means of increasing the supply of conditional, as distinct from unconditional, liquidity.

If quotas were increased more rapidly than the demand for drawing facilities, the proportion of outstanding drawings to quotas would tend to decline, and the contribution of the Fund to unconditional liquidity would tend to become negative—gold and foreign exchange reserves would decline faster than gold tranche positions would expand. On the other hand, the expansion in the supply of, relative to the demand for, conditional drawing facilities would reduce members’ need for unconditional liquidity, and this is probably much more important than the above-mentioned effect on the supply of unconditional liquidity. To take a highly simplified example, suppose that with total quotas of 100, Fund gold holdings amount to 25, drawings outstanding in the credit tranches to 6, and gold tranche positions to 31, and that the transfer of 25 of gold to the Fund has resulted in a decline of 6 in members’ foreign exchange reserves. The Fund’s net contribution to conditional liquidity in the form of unused credit tranche positions would then be 94, and its contribution to unconditional liquidity would be 0. If, now, quotas were raised from 100 to 200, without any corresponding increase in the need for Fund drawing facilities, the Fund’s gold holdings and the associated negative impact on members’ foreign exchange reserves might both be doubled. Drawings outstanding in the credit tranches, however, would probably rise less than in proportion to quotas, say, by 3. Gold tranche positions would rise by only 28, against a loss of gold and foreign exchange reserves of 31, so that the Fund’s contribution to unconditional liquidity would decline by 3. However, the rise of 97 in its contribution to conditional liquidity (drawing facilities in the credit tranches) would surely reduce the need for unconditional liquidity by far more than 3.

Regarded as a method of increasing the liquidity provided by the Fund, increases in quotas have the disadvantage that they tend to occur—if past experience is any guide—in large amounts at infrequent intervals. A general increase in quotas has thus far occurred only once in the Fund’s history—in 1959—although, of course, increases in individual quotas have occurred at other times. It is true that these abrupt and infrequent expansions in conditional liquidity are only gradually utilized in drawings. Nevertheless, it is arguable that the abrupt increases in conditional—and reductions in unconditional—liquidity associated with increases in quotas should themselves be smoothed out over time.

One possible method would be for general increases in quotas to be considered annually; this, however, runs into the difficulty that countries are unwilling to seek authorization from their legislatures for such increases as often as once a year. A more promising variant would be for increases in quotas to be undertaken at less frequent intervals, say, once in five years, but to come into effect by annual installments.

Changes in Drawing Policies

The Fund possesses considerable power to vary the conditions on which consent is given to drawings or to the granting and use of stand-by arrangements. In particular, it can alter the degree of scrutiny of applications for, or the severity of the conditions imposed on, drawings over any given range of IMF positions; or alter the amount of drawings (in relation to quotas) to which any given policy applies.

For example, if it were felt that the quasi-automatic drawing rights now applicable to the gold tranche were still not quite automatic enough to induce all members to regard them as fully equivalent to their other reserves, it might be possible to arrange, by permanent stand-by arrangements or otherwise, that members could draw within that tranche without their applications even having to be considered by the Executive Board. Members would still be under obligation to draw only to meet a payments deficit, and would consult with the Managing Director regarding the currencies to be drawn.

Again, the proportion of a member’s quota that may be drawn upon quasi-automatically could be altered. For example, drawings in, say, the first 5 per cent of quota beyond the gold tranche, instead of being granted on the condition (now applicable to the whole of the first credit tranche) that the member “is making reasonable efforts to solve its problems” could be granted on the same conditions as apply to the gold tranche. If such a step were taken, there would be an immediate increase in the amount of quasi-unconditional liquidity made available to members through the Fund. Unless further steps were taken, however, this increase in unconditional liquidity would involve some decline in conditional liquidity, since the amount that could be drawn within the credit tranches, subject to policy conditions, would be protanto diminished. However, the substitution of unconditional for conditional liquidity would no doubt have an effect on countries’ policies similar in kind, though not in degree, to that resulting from an outright increase in reserves.

Again, members might be permitted, through the exercise of the waiver power, to draw up to a higher maximum limit than is now customary,19 subject, however, to suitable conditions. Here, obviously, the immediate effect would be to increase conditional liquidity. However, since the adoption of this policy would lead to increased drawings, it would also tend to enhance the quasi-unconditional gold tranche positions in the Fund of those countries whose currencies are drawn.

Clearly, the above-mentioned policies could be combined. For example, if gold tranche drawing rights were extended to the first 5 per cent of the member’s quota beyond the gold tranche, the normal maximum of drawing facilities—apart from the compensatory financing facility—could be extended into the fifth credit tranche, e.g., to the point where the Fund would be holding 205 per cent of the member’s quota. In this way, unconditional liquidity would be increased without any reduction in conditional liquidity.

The examples of changes in drawing policies given above have as their object an increase in the amount or automaticity of drawing facilities.20 It is easy to see how they could be applied in reverse so as to bring about the opposite result.

Each extension of quasi-automatic drawing rights gives rise to a once-for-all increase in unconditional liquidity, followed by recurrent increases with each subsequent expansion of quotas. For example, the extension of quasi-automatic drawing rights to the first 5 per cent of quota beyond the gold tranche would yield an increase of $600-750 million in quasi-unconditional liquidity,21 and—if we assume a long-run constancy in the proportion of outstanding drawings to quotas—would mean that any subsequent general expansion in quotas would increase unconditional liquidity for this reason alone by some 4 or 5 per cent of the increase in quotas.

Now, suppose it were desired that the Fund should contribute to the expansion of conditional and unconditional liquidity, respectively, at specified annual rates. One way of achieving this result, in principle, would be to expand drawing facilities, both conditional and unconditional, through a liberalization of drawing policies, while keeping quotas constant. Such a course, however, would soon run the Fund into difficulties in finding the resources wherewith to implement the drawing facilities it offered. A more practical approach would be to increase quotas annually by an amount equal to the total increase in liquidity desired, while simultaneously extending quasi-automatic drawing facilities at the expense of conditional facilities. Since, as time went on, a given quota increase as such would generate a larger and larger increase in unconditional liquidity, the need for a progressive substitution of quasi-automatic for conditional drawing facilities would diminish and finally cease. Thus, suppose that the world “needed” a Fund contribution to unconditional liquidity amounting to $600 million per annum, and a contribution to conditional liquidity of equal amount.22 In order to add $1200 million to total liquidity, it would be necessary to expand quotas by some $1280 million.23 On the assumption that an increase in quotas under present conditions adds nothing to unconditional liquidity, the $600 million of unconditional liquidity required would have to be obtained in the first year by extending quasi-automatic drawing facilities at the expense of conditional drawing facilities by an equivalent amount (i.e., less than 4 per cent of present quotas). In the second year, a further addition of $1280 million to quotas under the new drawing conditions would, of itself, add some $45 million to unconditional liquidity, thus reducing to $555 million the addition to unconditional liquidity for which a further substitution of quasi-automatic for conditional drawing facilities would be required. And so on. Once quasi-automatic drawing facilities had been extended approximately through two credit tranches, amounting to 50 per cent of quotas, all required further expansion in unconditional liquidity would be provided by quota increases.

Turning to the second of the objectives listed above (p. 180), the question arises whether drawing policies can be adjusted with sufficient speed and flexibility to make a significant contribution toward meeting cyclical or short-term variations in the need for international liquidity. Though changes no doubt occur fairly frequently in the detailed interpretation given to these policies, they have been formally altered on only a few occasions in the history of the Fund, and only once or twice in a restrictive sense. To some extent this is inevitable. An explicit change in drawing policies requires a laborious process of formulation, and after this process has been gone through, time is required before members can see what the change means in practice. Moreover, the adoption of more restrictive policies might be regarded by some members as a breach of the understanding on which they had previously requested increases in quotas. Nevertheless, some of the inflexibility could be remedied. For example, it is not necessary that the tranches with respect to which policies are formulated should always be multiples of 25 per cent of quota. Moreover, despite the difficulties mentioned above, a more systematic periodic reconsideration of drawing policies might be aimed at, with a view to their being tightened up at times when inflationary pressures prevail or when countries show an undue reluctance to adopt realistic rates of exchange, and relaxed at times when the tendency is toward deflation or when a spread of restrictions tends to curtail the volume of international trade and payments.

Changes in Gold Policies

The Fund acquires gold (1) as part (normally 25 per cent) of initial quota subscriptions or of increases in quota subscriptions; (2) in a certain proportion of repurchases under Article V, Section 7(b), and Schedule B; (3) in some repurchases outside Article V, Section 7(b); (4) in charges under Article V, Section 8(f); and (5) in sales of currency for gold under Article V, Section 6(a).

The Fund may use gold (1) to replenish its holdings of scarce currency under Article VII, Section 2(ii); (2) to acquire income-earning investments under implied powers; or (3) to repay loans contracted under Article VII, Section 2(i).

The Fund has little power to vary the rate at which it acquires gold, though (1) in connection with an increase in a quota, the Fund may reduce the proportion of the increase to be paid in gold if the reserves of the member are less than its increased quota; and (2) it may be possible to induce members to include more or less gold in their repurchases outside Article V, Section 7(6). Apart, however, from the possibilities, discussed below, that the Fund might borrow gold or that it might secure the repayment in gold of investments originally made in gold, the main scope for varying the Fund’s gold holdings probably lies in the discretion it possesses with respect to the use of gold.

If the Fund uses its gold to purchase currencies that it needs for drawings, or if it induces members to repurchase in currencies—necessarily the currencies of net creditor countries—rather than in gold, the result in both cases is likely to be the same, namely, a decline in the Fund’s holdings of gold (as compared to what they would otherwise have been) and an increase in its holdings of the currencies of net creditor countries. The effect on the liquidity of the members primarily concerned will be slight, the increase in their gold reserves being offset, or nearly so, by the decline in their gold tranche positions. However, the countries whose currencies have been bought will probably consider their ratio of gold to foreign exchange assets as having increased and therefore use a fraction of their gold acquisitions for the purpose of acquiring reserve currencies. In this case there will be a secondary expansion in the reserve positions of the reserve currency countries.

The use of gold by the Fund to purchase creditor currencies may have further effects on world liquidity via its effects on the Fund’s own liquidity. If the currencies acquired are urgently needed, their acquisition may enable the Fund to avoid a contraction in drawings or a drawing of unsuitable currencies that would otherwise have been necessary. Such purchases will therefore affect the amount and distribution of international liquidity in an expansionary sense. On the other hand, if the currencies acquired are not urgently needed, the Fund’s liquidity may on balance be adversely affected, since the currencies acquired may not be those that will be most needed later, and the gold which could have been used later to acquire the latter currencies will have been dispersed.

To reduce the gold proportion of subscriptions to the Fund would have an expansionary effect in some ways greater, in other ways less, than the use of gold to acquire creditor currencies. Some, at least, of the countries whose gold subscriptions are remitted are likely to have substantial amounts of drawings from the Fund outstanding. Such countries, had they paid subscriptions in gold, would have lost reserves and gained, not drawing facilities in the gold tranche, but merely conditional drawing facilities in the credit tranches. The remission of the gold subscription thus enhances their liquidity. Moreover, since they would probably have obtained the gold by selling foreign exchange, the remission avoids a drain on the reserves of the reserve currency countries also. On the other hand, the substitution of holdings of currencies for holdings of gold tends to reduce the liquidity of the Fund.

If the Fund uses gold to repay indebtedness previously contracted under borrowing arrangements, the effect on international liquidity will probably be less expansionary than the operations so far considered. If, as is probable (see the section, Borrowing Arrangements, p. 203, below), the Fund instruments of indebtedness have conferred on their holders unconditional liquidity similar to that conferred by a gold tranche position, the “automatic” effects of such repayment (other than those resulting indirectly from repercussions on the Fund’s own liquidity) will be similar to those of a use by the Fund of gold to acquire a creditor currency, i.e., mildly expansionary. The effects on Fund liquidity, however, will be as adverse as in the circumstances described in the preceding paragraph, and the reaction on the Fund’s drawing policies might be a contractionary one.

The expansion in international liquidity that can be achieved by reducing the Fund’s gold stocks is necessarily limited in amount and is of a once-for-all character. On the other hand, in the absence of acts (of replenishment or investment) specifically designed to return gold to countries’ reserves, the Fund might gradually accumulate a stock of gold in excess of what it requires in the interests of its own liquidity. Such an accumulation would exercise on the growth of unconditional liquidity in the world a negative influence which, even if not strong, might well be undesirable.

The accumulation and decumulation of gold by the Fund could, in principle, be used as a means of bringing about variations in world liquidity but, for the reasons explained, their effect is likely to be moderate and largely confined to reserve currency countries. In any event, gold operations constitute a reasonably flexible instrument only in an expansionary direction. The Fund has no established means of acquiring gold in substantial quantities, save as a part of a general increase in quotas. One way of strengthening this instrument for use in a contractionary direction might be for the Fund to borrow gold. The effect of this would not be the precise opposite of the use of gold to repay indebtedness, since the enhancement which would occur in the Fund’s own liquidity could be, as it were, sterilized; it need not be allowed to affect the Fund’s policies on drawings, etc. However, any contractionary effect of such borrowing on the external liquidity of member countries would, as has been shown, be a mild one. Another possible method for the Fund to acquire gold would be for it to obtain repayment in gold of short-term investments which it might possess.24 The right to secure repayment in this form would be natural in the case of investments originally acquired through the payment of gold, and is indeed provided for in the case of the gold investments at present held by the Fund for income purposes. If the repayment were made in gold, the contractionary effect on world liquidity would be somewhat greater than if the repayment were made in currency.

Changes in Repurchase Provisions

The resources of the Fund are used to assist members in meeting temporary balance of payments deficits, including deficits arising out of seasonal, cyclical, or emergency situations. Under the Articles, members are obliged at the end of each year to repurchase on the basis of the development of their reserves. As a matter of Fund policy, members undertake to, or represent that they will, repay any drawings within three to five years of the date of drawing, and even earlier if the payments problem for which the drawings were made has been solved. The express repurchase provisions of the Articles show clearly that drawings from the Fund are intended to compensate or offset balance of payments fluctuations. The repurchase policies subsequently adopted imply a view that countries should aim at keeping their payments and receipts in balance over a moderate number of years. The Fund’s ability to induce drawing members to achieve such equilibrium by acceptable methods would be greatly reduced if there were not a time limit on repurchases. Under present policies, the Fund can say that it will renew drawings that fall due for repurchase only if suitable policies are adopted. Thus, the effective conditionality of the use of the Fund’s resources is linked to their revolving character.

By an act of policy, the Fund could alter its terms of repayment for drawings in ways that would allow drawings, or certain classes of them, to remain outstanding for longer periods. For example, the outside limit for drawings could be made four to six years, or five to seven years, instead of the present three to five years. The longer the period specified as the limit for repurchases outside Article V, Section 7(6), the greater would be the proportion of drawings which would have to be repaid under the provisions of Article V, Section 7. It could indeed be argued that the logical terminus to the process of liberalizing repurchases would be the abandonment of all stipulations as to repayment other than those arising under Article V, Section 7.

As has just been shown, such measures, particularly if carried to the point of abolishing all repayment undertakings, are open to the objection that they weaken the Fund’s ability to secure the adoption by drawing members of appropriate balance of payments policies. This objection would not, however, have great force with respect to drawings in the gold tranche, or in any other tranche to which quasi-automatic drawing rights may be extended, since in these tranches repayment provisions can easily be nullified by fresh drawings. The withdrawal of time limits on the use of the Fund’s quasi-automatic drawing facilities would therefore merely formalize the actual state of affairs, and would have the advantage of strengthening the resemblance of these drawing facilities to other reserves held by members. There may therefore be a case for rendering inapplicable any repurchase obligations, other than those arising under Article V, Section 7(6), where the effect of such repurchases would be to reconstitute quasi-automatic drawing facilities.

Where conditional drawing facilities are concerned, there are still further objections to the elimination of repayment undertakings or to extending their terms unduly. To make repayment contingent entirely on a recovery in reserves might weaken the incentive for countries to achieve a payments surplus and a consequential rise in reserves. Moreover, as the duration of the drawing extends beyond five years, it becomes more and more questionable how far it can be regarded as bona fide balance of payments financing. The concept of compensatory or balance of payments financing rests on the notion that countries should so act as to ensure that any deficits in the remaining (noncompensatory) items of the balance of payments are succeeded by equivalent surpluses in the foreseeable future. Where the balance of payments is concerned, it is difficult to forecast with any confidence a period more than five years ahead—though admittedly the possibilities of balance of payments planning vary greatly as between countries.

Any extension of the time allowed for the repayment of drawings along the lines discussed above would increase the degree of utilization of quotas (i.e., the average ratio of outstanding drawings to quota), and would thus increase the proportion of unconditional liquidity to conditional liquidity (as measured by the credit tranche positions remaining unused) provided by the Fund. It is unlikely, however, that any mere lengthening of repayment terms while retaining the repurchase provisions of Article V, Section 7(b), would make a significant contribution to the growth of unconditional liquidity or reserves. If this effect were desired, it would probably be necessary for the Fund to transcend the sphere of balance of payments financing altogether and to provide, in addition to such financing, longer-term lending of noncompensatory kinds. It would probably be a wrong approach to the problem to seek to introduce a new type of long-term drawing facility that would be exempt from the repurchase provisions of Article V, Section 7(6), but would still be related to quotas and still be activated on the initiative of the drawing country. Since the primary purpose of the Fund’s entry into the longer-term lending field would be less to accommodate the immediate borrowers than to enable the Fund to make a net contribution to the stock of reserves, it would be more appropriate to consider such longer-term lending under the head of investment by the Fund, which is the subject of the next section.

Investment by the Fund

By “investments” are here meant essentially any securities (other than the Fund’s own instruments of indebtedness) which the Fund might buy or sell but which would not count as holdings of a member’s currency for the purpose of calculating drawing entitlements, repurchase obligations, etc., and would therefore leave unaffected such rights and obligations. Under implied powers, the Fund has used gold to the extent of $800 million to acquire investments, in the form of interest-bearing U.S. dollar securities redeemable on demand with a gold guarantee, for the purpose of maintaining the income of the organization and providing a certain reserve.

In what follows, we consider the consequences of extending the concept of investment by the Fund so that it may be undertaken for purposes relating not only to the Fund’s income but also to international liquidity, and so that it may be financed not only out of the Fund’s gold holdings but also out of its currency holdings (whether the currency of the country in which the investment is made or another) or by borrowing. For simplicity, it is assumed that the investments take the form of securities denominated in the currency of the country in which the investment is made (the “country of investment”), but subject, like currency holdings under the Articles, to a gold-value guarantee; and that they are bought and sold from or through the government of the country of investment.

Since this is a type of operation not yet undertaken, it can be given any characteristics desired. However, in order that the power of investment should be useful, we shall assume it to possess the following characteristics, the first of which follows from the definition given above. First, investments would not enter into the calculation of the Fund’s holdings of currencies, or of the IMF position of the countries of investment, and would not as such affect their drawing rights (though the method of acquisition of the investments might do so). Second, the formal initiative as to the buying or selling of investments in any particular country would lie with the Fund, though the consent of the country of investment would be necessary both for purchases and for sales before maturity. Third, investments would be made on long term as well as on short term.

By virtue of the first characteristic listed above, investment would permit of an increase in the amount of external liquidity, unconditional and conditional, available to Fund members at any given level of quotas. This effect would be most clearly seen if the Fund purchased an investment in a member country by using its ordinary holdings of that member’s currency. The decline in these holdings would improve the IMF position of the country of investment, and thus increase its drawing facilities, without impairing the IMF position of any other member. The initial position of the country of investment would determine whether the drawing facilities acquired were quasiunconditional gold tranche drawing rights or conditional facilities in the credit tranches.

If the Fund used its holdings of country B’s currency to invest in country A, the effect would be the same as if it had used its holdings of A’s currency for this purpose while at the same time A had made a drawing of B’s currency. If, as might often be true for this kind of investment, A had initially a debtor IMF position and B a creditor position, the effect of the drawing element in the transaction would be to transform what would otherwise have been an expansion of conditional liquidity into an expansion of unconditional liquidity.

Again, if the investment in A were paid for out of the Fund’s holdings of gold, the effect would be similar to a combination of an investment financed from the Fund’s holdings of A’s currency and a use of the Fund’s gold to purchase A’s currency. Generally speaking, the investment of gold would have a more expansionary effect on unconditional liquidity than any other kind of investment.

The second characteristic suggested for the power of investment, namely, that the Fund should have more initiative and freedom of action than with respect to drawings, is clearly one the degree of which is debatable. It would, however, seem desirable that member countries should have no right to receive an amount of investment, or even a share in total investments, in any way related to quota, though doubtless the solicitation of investment could not in practice be excluded. Though for investments, as for drawings, the consent both of the Fund and of the country of investment (cf. the drawing country) would doubtless be necessary, nevertheless the fact that the initiative lay with the Fund should give the latter much more effective power in influencing the amount, timing, and distribution of investments than it has with respect to drawings.

The third characteristic proposed for investment, that it extend to assets of long as well as short maturity, is, of course, of fundamental importance for the Fund’s ability to expand the total amount of credit—and hence the amount of unconditional liquidity created in the form of gold tranche drawing rights or instruments of the Fund’s indebtedness, relative to the amount of short-term to medium-term conditional drawing facilities which it provides. Investment by the Fund is thus a third way of bridging the possible gap between what the Fund ought to contribute to the expansion of unconditional liquidity or reserves and what, if anything, it contributes as the counterpart to the use of its conditional drawing facilities. The other two possible ways of bridging this gap, as already explained, are an extension of quasi-automatic drawing rights beyond the gold tranche and a lengthening of the term of drawings.

Investment differs from an extension of quasi-automatic drawing rights beyond the gold tranche in five main respects: (1) it can be distributed more selectively than an extension of automatic drawing rights, which would normally be applied to all members in proportion to their quotas; (2) insofar as the investment is made with a currency other than that of the country of investment, it resembles an extension of automatic drawing rights plus an actual drawing; (3) investment will create more drawing facilities free from repurchase obligations than will an equal extension of automatic drawing rights beyond the gold tranche; (4) investment will constitute a bigger drain on the Fund’s resources than will an equal extension of automatic drawing rights;25 (5) whereas an extension of automatic drawing rights beyond the gold tranche automatically increases the effectiveness of increases in quotas in expanding unconditional liquidity, investment does not. To achieve a similar result, investment would have to be increased pari passu with the increases in quotas.

Investment of the type outlined differs from the introduction of longer-term drawing rights mainly with respect to the first two characteristics of investment discussed above. Owing to these characteristics, Fund investment has the advantage over the provision of long-term drawing facilities that it could more easily be kept distinct from the Fund’s everyday task of providing short-to-medium-term drawing facilities, and is therefore more likely to leave that valuable function unimpaired.

In one respect, investment might act more powerfully on a country’s policies than either of the other two methods of expanding credit from the Fund, viz., if it is regarded by the country of investment as entering into its balance of payments as a positive item “above the line.” An increase in liquidity that results from a payments surplus (or a decline in liquidity that results from a payments deficit) is likely to be more effective than one arising independently of the balance of payments.

Insofar as investment is employed for the purpose of enabling the Fund to contribute to a long-term expansion in the trend of unconditional liquidity, it would seem appropriate that it should take the form of a purchase of securities amortized over a long period of time—e.g., 20 years. While the Fund would, of course, not be precluded from holding long-term investments in the more highly developed countries, it would seem desirable that as high a proportion as possible should be held in those countries where the need for capital is, humanly speaking, greatest—namely, the less developed countries. Since the latter would be unlikely to use the proceeds of such investments to build up their own reserves, but would spend them on the products of the industrial countries, the effect on the reserves of the industrial countries would probably be almost as great as if the investments had been made in these countries in the first place. Moreover, insofar as the object of expanding liquidity is to encourage the industrialized countries to adopt more expansionary financial policies, the underlying purpose would be better achieved by investing in the less developed than in the more highly developed countries, since in the former case increased liquidity would accrue to the industrialized countries in the form of export receipts, with a stimulating effect on incomes, and in the latter case it would accrue only in the form of greater ease in the money and securities markets. Investment by the Fund in less developed countries should, of course, not exceed amounts which the countries in question could economically absorb at the relatively low rates of interest which the Fund would be able to charge. Such investments would not be part of the Fund’s own liquid reserves; they would be a means to the creation of liquidity in the hands of national monetary authorities, with beneficial side effects on the provision of resources for economic development.

Any long-term investment by the Fund in the less developed countries should presumably be carried out as far as possible through existing intermediaries, such as the IBRD and the IDA, though neither the terms and conditions of the investments nor even the investment criteria need be precisely those at present applied by either of these institutions. While the technique here discussed has some resemblance to the “Stamp Plan,”26 there is no suggestion that the investments should be in any way tied to imports from such countries as are willing to accept additional claims on the Fund, nor is it suggested that those claims should necessarily take the form of transferable certificates rather than, for example, gold tranche positions.

The technique of investment (and disinvestment) has certain advantages over that of changes in the liberality or severity of drawing policies as a means of bringing about such temporary variations in the amount of liquidity as may be useful in counteracting cyclical fluctuations in the industrial world. Temporary changes in the amount of unconditional liquidity, such as may be called for by alterations in the condition of the foreign exchange markets, are likely to be evoked, through variations in the demand for drawings, even with constant drawing policies. Where some positive anticyclical action is called for, however, drawing policies are likely to prove too inflexible, and open market policies more effective. Investments for this purpose could be of a short-term though renewable character, and would normally be made predominantly in the industrial countries.

Long-term investment in central reserve countries might also be an appropriate means of counteracting any sudden and substantial decline in official holdings of reserve currencies. These investments should be on long term to cover the possibility that the decline might be a permanent one, but there could be arrangements for withdrawing the investments if official holdings of the currencies in question should recover.

Ways of Influencing International Liquidity Through Changes in Fund’s Ability to Provide Financing

The Fund provides its members with international liquidity through its readiness to provide financing, in the form of drawings or of repayment of the Fund’s own indebtedness. But such financing involves the provision of currencies other than that of the country that is being financed. The Fund cannot carry out this financing unless it has access, preferably assured access, to the currencies that it requires. Moreover, as we have seen, acts of financing by the Fund, whether in the form of drawings, repayments, or investment, give rise to claims on the part of the countries whose currencies are used—claims which are generally themselves of a liquid character. The Fund must have assurance that those of its members that are in a strong balance of payments position will be willing to accumulate and hold such claims, and will not compel it to withhold or withdraw financing from countries that need it. The Fund cannot create international liquidity, any more than a domestic banking system can create domestic liquidity, unless its members (customers) are willing to hold additional liquidity in the form of claims upon it. These are aspects of the Fund’s problem of obtaining sufficient resources to enable it to discharge its functions properly.

Apart from repurchases (i.e., repayments of drawings)—which of course restore its power to extend new drawings but do not enable it to increase the net amount of drawings outstanding—the Fund has two main ways of replenishing its resources, and thus of ensuring that it can continue to expand world liquidity, viz., increases in quotas, and borrowing arrangements.27

Increases in Quotas

Increases in quotas affect countries’ liquidity in the manner discussed in an earlier section. They also provide the Fund with additional resources consisting of gold and “drawable” currencies, the former to the amount of 25 per cent of all quota increases, and the latter to the amount of 75 per cent of the additions to quotas of countries whose currencies are, at any given time, usable for drawings. The addition to the Fund’s holdings of gold and drawable currencies is intended to maintain the Fund’s liquidity, i.e., to enable it to honor the enhanced drawing facilities that accompany the quota increases without the necessity of paying out the currencies of countries that are in a weak balance of payments position or reserve position and might thus be embarrassed by the drawing. In the short run, before countries have had time to use their new drawing facilities, a rise in quotas will necessarily increase the Fund’s liquidity. In the long run, however, if the increase in quotas is matched by a corresponding proportionate increase in the demand, and need, for drawings, the additional resources provided by an all-round increase in quotas will only suffice to enable the Fund to maintain its original degree of liquidity. Thus, if the original country distribution of quotas, relative to the distribution of potential payments surpluses and deficits, was such that the resources of the Fund had to be supplemented by borrowing arrangements with certain countries, and if the distribution of potential surpluses and deficits remains unchanged, a quota increase as described above will normally have to be supplemented by a proportionate increase in the borrowing arrangements. Only insofar as the increase in quotas outstrips the increase in the demand, and need, for drawings will it be possible for the Fund to reduce its reliance on such arrangements.

Thus far we have dealt with general, all-round increases in quotas. Quotas, however, can be increased at different times for some classes or groups of members (e.g., members with “small” or “medium” quotas), to the exclusion of others. If the quotas increased are primarily those of countries that are seldom in a net creditor position and frequently in a debtor position, the increases will have effects in some ways comparable to the adoption of more liberal drawing policies—the level of outstanding drawings will be increased without any increase in the Fund’s resources and with some decline in the Fund’s liquidity. Conversely, if the quotas increased are mainly those of countries normally in a creditor position, the main—though not the only—effect will be to increase the resources and the liquidity of the Fund, and to reduce the need for borrowing.

Borrowing Arrangements

Under Article VII, Section 2, the Fund can borrow a member’s currency from that member, or (with the consent of both parties) from another source, whenever “it deems such action appropriate to replenish its holdings of any member’s currency.” Such borrowing may affect the liquidity of members directly, but much more important is its effect, or the effect of the arrangements under which it is carried on, on the liquidity or resources of the Fund itself.

The nature of the borrowing arrangements will determine (1) the nature of the resources made available to the Fund; (2) the conditions governing repayment and the other characteristics of the instruments of Fund indebtedness; and (3) the conditions under which the resources are made available to the Fund.

As regards (1), the proviso from Article VII, Section 2, quoted above, would seem to confine the currencies that might be borrowed to those suitable for being drawn from the Fund, though the Fund’s need for the currencies in question does not necessarily have to be immediate.

As regards (2), countries acquiring claims on the Fund by lending to it might be able to require the Fund to convert these, on demand, into currencies or gold; or the claims might be repayable at fixed dates but (like gold tranche drawing rights) convertible into foreign currencies whenever required to meet payments difficulties experienced by the lending country; or convertible in some proportion to the decline in that country’s other reserves; or repayable only on maturity. The duration of the claims might be short or long. They might be transferable generally, as between central banks, or not at all. They might be interest-bearing or otherwise.

The precise degree of liquidity to be accorded to a claim on the Fund arising out of an act of borrowing is thus variable, and should depend on the effect that the Fund wishes to exercise on world liquidity. In practice, it might be difficult to induce lending members to be content with a lesser degree of liquidity than that afforded by a gold tranche position in the Fund unless substantial interest were paid. On the other hand, it would be important for the Fund’s own liquidity that lenders collectively should not be in a position to encash too high a proportion of their claims on the Fund at any one time. Any system of deposits withdrawable (i.e., convertible into currency or gold) on demand would leave the Fund exposed to the possibility of “runs” that might deprive it of the power to maintain or expand world liquidity at a time when this was required. It would, therefore, seem necessary that repayment of the Fund’s indebtedness on the initiative of the creditor should be confined to situations in which the creditor was able to represent that its balance of payments created a need for such repayment. The precise degree of liquidity that could safely be given to instruments of the Fund’s indebtedness would depend in part, as will be shown, on the nature of the access to resources conferred on the Fund by the borrowing arrangements.

In discussions of international liquidity, emphasis is often laid on transferability as an important attribute affecting the liquidity of claims on the Fund arising out of Fund indebtedness. Any value such transferability might have for the holders of such claims would depend on the willingness of other countries to accept transfers. Such willingness could certainly not be relied on in the absence of definite arrangements whereby countries would agree to accept transference of such claims up to specific amounts. These arrangements, in turn, would be likely to be at the expense of undertakings to provide resources directly to the Fund. Countries might even insist that claims on the Fund transferred to them be counted against any lines of credit which they might be extending to the Fund. The system is therefore not one which would provide additional facilities for Fund members at no cost to the Fund’s resources. The fact that the transferee would be, by definition, a willing holder of claims on the Fund would be an advantage, but bilaterally arranged transfers might conflict with those general understandings regarding an equitable distribution of liquid claims on the Fund which would probably be necessary if the Fund was to supply unconditional liquidity on a large scale. If the rights of the creditor to encash indebtedness to meet payments difficulties were made sufficiently automatic—in conformity with suggestions made earlier for further increasing the automatism of drawings in the gold tranche—the attractions of transferability to the lender might well become negligible.

It should be noted that if, as appears likely, the degree of liquidity attending to instruments of Fund indebtedness were not very different from that attaching to a gold tranche position, an act of borrowing by the Fund, taken by itself, would be likely to have only a minor effect on countries’ external liquidity. A member lending its own currency would probably be a country with a gold tranche position. The rise in the Fund’s holdings of its currency would involve a decline in that position, to offset which it would acquire a claim on the Fund of a degree of liquidity comparable to that afforded by a gold tranche position.28 Conceivably the claim on the Fund, having the legal form of an asset, would be deemed by the member as more worthy of inclusion in its reserves than any kind of drawing right. The real gain in liquidity would, however, be slight or negligible. Again, if a member lent to the Fund gold or the currency of another member, the lending member would acquire a highly liquid claim on the Fund but would suffer a corresponding loss in its reserves. A country whose currency was lent to the Fund by another member would suffer a decline in its Fund position, probably a gold tranche position, but its other reserves might benefit from the reduced supply of its currency in the international exchange market. However, if the act of lending to the Fund involved a decline in the holding of foreign exchange reserves, the net effect would be to reduce international liquidity.

The real significance of an act of borrowing is that it would increase the Fund’s resources without having much direct or immediate effect on members’ liquidity. (In this respect it contrasts with a quota increase, which, as we have seen, would not only increase Fund resources but also immediately enhance members’ conditional liquidity in the form of drawing facilities in the credit tranches.) However, as soon as the Fund used the resources it had borrowed, whether for additional drawings or investment, a net increase in international liquidity of the sort described in earlier pages would occur.

As regards (3), resources might be made available to the Fund (a) in the form of deposits made on the initiative of the lender, though on conditions laid down by the Fund and possibly subject to quantitative limits established by the Fund; (b) under lines of credit, calls on which could be on the Fund’s initiative subject to conditions agreed in the credit arrangement; or (c) as the outcome of an agreed rule of a more or less automatic statistical character.

The Fund could not, at present, accept deposits entirely at the will of the lender and in any currency that the lender chose to deposit. It could accept only currencies potentially needed for drawings, and then only if the country whose currency was deposited consented. However, the Fund could reasonably declare its willingness to accept deposits in any currency of which its holdings fell below a certain low percentage of quota (say, 25 per cent or 20 per cent), provided that the deposits were made by or with the consent of the country whose currency was deposited. Interest rates could be such as to make such deposits attractive. While depositors might hesitate to incur the loss involved in depositing at par strong currencies standing at a premium in the market, they might hope to recoup this loss by drawing premium currencies at par when the time came to withdraw their deposits. One attraction of this technique would be that, since the deposits would be made on the initiative of the depositor, no negotiation would be necessary between the lender and the Fund.

On the other hand, the system of voluntary deposits would seem to leave the Fund dangerously exposed to net withdrawals of its resources. This would be true even if the right to withdraw were confined to countries with a payments need, for there would be no assurance that surplus countries would necessarily be induced by the mere attraction of the interest paid, the gold guarantee, etc., to add to their deposits at a time when deficit countries were being compelled by payments difficulties to withdraw theirs. If deposits were encashable on demand, the situation would be even more precarious, since a general nervousness on world exchange markets, or a lack of confidence regarding the Fund’s own liquidity, might lead to a net withdrawal of deposits just at the time when the Fund was anxious to extend itself in assisting member countries.

Lines of credit could be established by the Fund with individual lenders or, as in the General Arrangements to Borrow, with a group of lenders. The line of credit would have one very important advantage over the mere acceptance of deposits, in that it would ensure the Fund of access to additional resources for the lifetime of the stand-by arrangement. Voluntary deposits, once they had been withdrawn (e.g., to meet a payments deficit of the creditor) might not be reconstituted if the interest paid was not attractive or if the Fund’s own liquidity was suspect. In the line-of-credit technique a similar difficulty would arise only when the credit arrangement lapsed and had to be renewed. It might, moreover, be possible to have permanent credit arrangements or lines of credit which, like subscriptions, would give the Fund a permanent increase in reserves.

The nature of the tension between a lending country’s right to secure payment of its loan at need, and the Fund’s right to draw on the line of credit at its need, is broadly analogous to that described earlier as existing between a member’s right to draw on a gold tranche position and the Fund’s right to sell the member’s currency and thus to increase or restore that gold tranche position. Some conventional rule is required to determine to what extent the Fund should draw on any given country’s line of credit. The rule might be, for example, that the Fund would borrow from any given country to whatever extent was required to prevent its holdings of that country’s currency from falling below some (low) percentage of its quota. The Fund’s policy with respect to currencies to be drawn and used in repurchase would be determined so as to secure an equitable distribution of net IMF positions among creditor countries, including in the concept of net IMF positions not only gold tranche positions but also amounts lent to the Fund. Lending countries incurring payments deficits would be expected to take advance repayment of their loans before drawing their gold tranche positions below the aforesaid percentage of quota.

A good example of the third technique mentioned above, whereby countries lend to the Fund according to some statistical criterion, would be an arrangement under which many or all Fund members would hold claims on the Fund in some proportion to, or as a function of, their total gold and exchange reserves. These claims would be acquired by depositing gold or currencies needed by the Fund. This would provide for a long-term growth in Fund resources pari passu with the growth of official reserves and, if used to finance an expansion in investment by the Fund, or in drawings relative to quotas, would make possible a long-term growth in the liquidity provided by the Fund. Such an arrangement would, however, make great demands on the willingness of countries to undertake important commitments—though not necessarily sacrifices—for an international end. Moreover, a once-for-all commitment would not suffice. If, as is probable, it became necessary, in order to secure a higher proportionate rate of expansion of world liquidity than that of monetary gold stocks, to raise periodically the proportion of reserves held in the form of claims on the Fund, a new agreement would be called for on the occasion of each increase.

One disadvantage of a simple system under which countries would hold a proportion of their reserves in the form of Fund deposits would be that, especially when that proportion was still small, they could use such deposits to cover only a small part of any payments deficits that they might have. This would make the holding of a deposit less attractive than the holding of a gold tranche drawing right, and might constitute a real hardship for the majority of countries whose own currencies would not be acceptable for deposit and who would therefore have to establish deposits at the expense of other reserves. The hardship would be greater if a part of the gold and foreign exchange holdings of the countries in question were pledged or otherwise unusable. A possible way round this difficulty might be a provision under which deposits with the Fund could be withdrawn pari passu with a decline in the depositor’s other reserves and reconstituted pari passu with any recovery in these reserves until the required proportion was restored. Regulations might be required establishing priority between such reconstitution and repurchases of any drawings outstanding.

The three modes of Fund borrowing discussed above are merely illustrative. The borrowing instrument is very flexible. Many different combinations can be imagined. For example, the following system—involving a combination of the system of voluntary deposit with that of lending to the Fund in relation to a statistical criterion—might be of use for maintaining the level of international liquidity if that were threatened by some temporary or permanent decline in the propensity of monetary authorities to hold reserves in the form of foreign exchange, and if no adequate arrangements or understandings existed among these authorities with respect to the holding of reserve currencies.

The Fund would stand ready to receive deposits (i.e., to borrow) in reserve currencies held by monetary authorities to the extent that the latter wished to reduce their holdings thereof. Currencies thus acquired by the Fund would immediately be invested (i.e., held in a form apart from its ordinary currency holdings) in the countries whose currencies were deposited, and would thus leave unaffected the usual drawing facilities available to these countries. Such investments—which would, like other Fund investments, carry a gold guarantee—would be amortized in gold or currency acceptable to the Fund over a lengthy period (e.g., 20 years), and would also be redeemable on demand in domestic currency at the Fund’s request. If depositing countries should subsequently desire to increase their holdings of the currencies formerly deposited, they would be under obligation to do so in the first instance by withdrawing their deposits from the Fund, which would in turn encash its investments. As long as the transaction had not been reversed according to this procedure, the deposit, though convertible into needed currency if required to meet payments deficits of the depositor, would have to be reconstituted when the other reserves of the depositor increased (or possibly according to some repayments schedule).

The main effect of this arrangement would be to enable countries losing confidence in a reserve currency to substitute a gold-guaranteed claim on the Fund. If the loss of confidence should turn out to be permanent, the system would permit the euthanasia of the reserve currency in question, but this would not be assumed in advance to be inevitable. Instead, the fact that a temporary gold guarantee could be obtained whenever necessary would probably strengthen the desire to hold reserve currencies.

Interrelation Between Fund’s Credit Policy and Form in Which Resources Are Raised

The two main methods of expanding the Fund’s resources, by increases in quotas and by borrowing arrangements, respectively, have consequences that differ in two respects. The first, and obvious, difference is that the former method implies that increases in countries’ unconditional liquidity (insofar as achieved through the Fund) will take the form of quasi-automatic drawing rights, while the latter method implies that they will take the form of liabilities of the Fund. The second, and more important, difference is that increases in quotas are associated, while increases in borrowing arrangements are not, with increases in drawing facilities in the Fund. From these considerations it follows that any preferences between automatic drawing rights and Fund liabilities as the form in which unconditional liquidity created by the Fund should be held, or any preferences between increases in quotas and borrowing as the method whereby the resources of the Fund should be raised, will have implications for the extent to which drawing facilities can appropriately be provided, or investments appropriately acquired, relative to quotas.

For example, if it were desired to avoid the necessity for borrowing by the Fund, and to create liquidity exclusively in the form of IMF positions, there would be a limit to the extent to which drawing policies could be liberalized, and/or drawing facilities extended to additional tranches, and/or investments expanded. All these acts would involve an expansion in the amount of credit extended by the Fund relative to the amount of quotas and thus in relation to the resources in gold and drawable currencies provided by the subscriptions.

Again, if it were decided, in order to avoid the necessity for an immediate increase in quotas, that additional drawing facilities should be provided by the adoption of more liberal drawing policies, it should be realized that once this liberalization had had time to take full effect, it would increase the likelihood that recourse to borrowing would be necessary.

It was pointed out above that if it were desired that the growth in quasi-unconditional liquidity provided through the Fund should outstrip the growth in short-to-medium-term conditional drawing facilities, one of the ways of achieving this would be for the Fund to expand its holdings of investments relative to drawing facilities in the credit tranches. Such a development, however, would be likely, if carried far, to involve a necessity for borrowing by the Fund on a substantial scale.

If the extension of quasi-automatic drawing rights beyond the gold tranche, rather than investment, were the technique adopted for raising the Fund’s contribution to unconditional liquidity relative to its contribution to conditional liquidity, the resultant dependence on borrowing arrangements would be considerably less. For example, suppose that quasi-automatic drawing rights were extended beyond the gold tranche by 250 units, while conditional drawing facilities in the credit tranches were maintained by an equal extension of the limit on total drawings. Precisely the same effect on the amounts of unconditional and conditional drawing facilities available to each country could have been achieved by a Fund investment to the amount of 250 units distributed among members in proportion to quotas and purchased with the currencies of the countries in which the investments were made. Drawings outstanding would increase under both procedures to a similar extent; but the investment method—to the extent that investments were made in countries whose currencies were drawable—would use up the Fund’s stock of these currencies, and thus draw down the resources of the Fund, to a greater extent than would the method of extending automatic drawing facilities. If, as is likely, investments in the less developed countries were made not in their own currencies but in drawable currencies, the increase in unconditional liquidity resulting from the investments would be greater than has been assumed above; but so, pro tanto, would be the drain on the Fund’s resources.

It does not follow from what has been said that pursuit of the investment path to the creation of international liquidity by the Fund necessarily involves undue reliance on borrowing. This could be avoided by means of suitable adjustments in drawing policies, in such a way that conditional drawing facilities were kept from rising proportionately while quotas were expanded to provide the resources necessary to finance the investment. However, in the past, drawing policies have not been very flexible, and such flexibility as there has been (since the first years of the Fund at any rate) has been mostly in the direction of liberalization.


It is reasonable to believe that there will be a need, as the years pass, for a gradual expansion in the amount of short-to-medium-term credit that is made available to monetary authorities conditionally on the adoption of policies directed toward the maintenance or restoration of equilibrium. Such conditional liquidity can suitably be provided by a gradual expansion of conditional drawing facilities in the Fund.

It is possible that the long-term upward trend in the liquid reserves of countries is inadequate and requires, or will require, to be supplemented by a similar or faster rate of growth of unconditional or near-unconditional liquidity in the form of quasi-automatic drawing rights and/or of the creation of indebtedness by the Fund with quasi-automatic repayment features.

Once it was decided what would be a desirable (long-run) rate of growth in the Fund’s provision of conditional and quasi-unconditional liquidity, respectively, there would be a variety of ways—from an expositional standpoint an embarrassing variety of ways—in which this could be achieved.

For example, even if it were decided (1) that the Fund’s borrowing arrangements should be confined to a given proportion of quotas, and (2) that an investment power should not be used, it would be possible to attain the desired expansion in the Fund’s provision of conditional and quasi-unconditional liquidity by a suitable combination of (a) expansion of quotas, (b) adjustment, through drawing policies, in the proportion of conditional to quasi-automatic drawing facilities, and (c) adjustment, through drawing policies, in the proportion of total drawing facilities to quotas. In all probability, the proportion of conditional to quasi-unconditional drawing facilities and the proportion of total drawing facilities to quotas would both have to decline.

Again, if assumption (1), regarding borrowing, were retained, assumption (2) abandoned, and a new assumption (3) added, to the effect that no adjustment would be permitted in the proportion of conditional to quasi-automatic drawing facilities, then the desired result could be obtained by a combination of expansion of quotas, investment, and adjustment in the proportion of drawing facilities to quotas. In all probability, the proportion of investment holdings relative to quotas would have to rise, while that of drawing facilities relative to quotas would have to decline. As we have seen in the preceding section, this method would require a more severe curtailment of drawing rights relative to quotas than would the method considered in the preceding paragraph.

Finally, if it were impracticable for any reason for total drawing facilities to decline relative to quotas, it would no longer be possible to enforce any given upper limit on borrowing relative to quotas. This would be true whether the approach to the creation of unconditional liquidity was through the extension of quasi-automatic drawing facilities or through investment. Any such limit, however, would be more quickly reached if reliance were placed on investment than if it were placed on an expansion of quasi-automatic drawing facilities at the expense of conditional ones.

From what has been said, it would appear that the Fund could contribute to the long-term expansion in unconditional liquidity without necessarily engaging in more active investment. The same objective could be achieved with less resort to borrowing by an extension of quasi-automatic drawing rights beyond the gold tranche. On the other hand, investment would be a more selective way of expanding quasi-automatic drawing facilities, and the facilities in question would be less encumbered with (even nominal) repurchase obligations.

Insofar as the investment power was used for this purpose, there would be no reason why a proportion of the investment involved should not be directed toward the less developed countries.

In order to smooth out the growth in quotas, quota increases could take place in annual installments.

The Fund’s contribution to the long-term growth of unconditional liquidity could be slightly—but only slightly—enhanced if the accumulation of gold stocks that might otherwise result from quota increases were avoided by judicious purchases of needed currencies.

It might be necessary for the Fund to depend to some extent on borrowing to supplement its resources. Voluntary deposits would be an unreliable source of resources for the Fund. Borrowing stand-bys would be preferable, but should be kept as free as possible from restrictions that would hamper the Fund in the use of the resources received. One way to deal with long-term problems might be an arrangement in which each member normally held a proportion of its resources in the form of deposits with the Fund, with provision for temporary withdrawal in times of need.

Cyclical or temporary variations in the desirable level of international liquidity may take place either because of variations in the instability of international payments or because of variations in the pressure of monetary demand for goods and services, or for both reasons. The first sort of change in the need for financing is likely to result in a change in the use of Fund drawing facilities and thus in an answering change in the supply of liquidity. In the second type of change, however, and even to some extent in the first, any responsiveness in the supply of liquidity is likely to be insufficient. In this event, there would be a case for varying either the amount of the Fund’s investments or the liberality of its drawing policies. In view of the inflexibility of such policies, the former technique is likely to be the more practicable. This sort of variable investment should be short term and renewable and should be held mainly in industrial countries. The resources required to finance such temporary extensions of Fund credit might in some instances be provided by effecting increases in quotas (or increases in the proportion of reserves held in the form of deposits with the Fund) earlier than would otherwise be appropriate. However, it would generally be appropriate to supplement the Fund’s resources with borrowing arrangements of the stand-by type.

The third of the possible reasons, mentioned on page 180 above, why the Fund might have to take action in the field of international liquidity is that it might be necessary to offset the decline in liquidity that would ensue should there be any decline in countries’ willingness to hold reserves in the form of foreign exchange. The most effective action open to the Fund in this contingency would appear to be the acquisition of long-term investments in reserve currencies, reversible if the willingness of countries to hold foreign exchange should recover. This, however, might create a temporary or permanent need by the Fund for additional resources. A scheme whereby such resources might, in the assumed circumstances, be raised by borrowing is described on page 203.

Le Fonds et la liquidité internationale


Cet article examine par quels moyens le Fonds, avec les pouvoirs dont il dispose actuellement ou par extension de caractère organique de ces pouvoirs, pourrait s’adapter afin de jouer le rôle principal dans l’expansion ou la réduction de la liquidité internationale.

Une distinction importante est établie entre la liquidité incondition-nelle ou quasi-inconditionnelle (telle la liquidité disponible sous forme d’avoirs de réserve ou au titre d’une tranche-or au Fonds) et la liquidité soumise à certaines conditions quant à l’usage qui doit en être fait ou aux politiques que doivent suivre les détenteurs (par exemple les facilités de tirage dans les tranches de crédit du Fonds).

La portée des transactions du Fonds sur la liquidité conditionnelle et inconditionnelle des opérations avec le Fonds est étudiée. I1 est montré que le Fonds, aux termes des lignes de conduite actuellement suivies, fournit avant tout de la liquidité conditionnelle.

Vient ensuite un examen des principales modifications des pratiques du Fonds qui pourraient lui permettre de contribuer de façon plus efficace à soutenir la tendance à l’accroissement de la liquidité internationale, à rendre les disponibilités en liquidités plus sensibles aux besoins courants, et à neutraliser toute tendance spontanée à l’instabilité dans le système de réserves. A cet effet, l’auteur considère tour à tour les conséquences du relèvement des quotes-parts du Fonds, de la modification de sa politique de tirage, de la modification de sa politique de rachat, du changement de ses avoirs en or, et du développement de ses opérations d’investissement. Il estime que les principales méthodes d’expansion de la liquidité du type “réserve” par l’inter-médiaire du Fonds impliquent soit l’extension de droits de tirage quasi-inconditionnels aux tranches de crédit, soit un développement de la fonction d’investissement.

Enfin, un examen critique porte sur les différents moyens, tels le relèvement des quotes-parts, et un certain nombre de formes possibles de modalités d’emprunt (entres autres l’acceptation de dépôts), par lesquels le Fonds pourrait acquérir les ressources qui lui permettraient de mener à bien ces politiques.

El Fondo y la liquidez international


Este artículo se ocupa de la forma en que dadas sus presentes facultades o ciertas ampliaciones de carácter orgánico de las mismas, el Fondo podría ser adaptado para que desempeñara el papel principal en la expansión o contractión de la liquidez international.

Se establece una importante distinción entre aquella liquidez disponible sin o casi sin condiciones (tal como la resultante de la posesión de activos que constituyen reservas o de la positión del tramo del tramo de oro en el Fondo), y la liquidez que se encuentra subordinada a ciertas condiciones en cuanto a su uso o a las políticas que los usuarios deben seguir (tal como la conferida por las facilidades de giro proporcionadas en los tramos de credito del Fondo).

También se estudia la manera en que las transacciones del Fondo influyen sobre la liquidez incondicional e incondicional de sus operaciones, y se muestra que de conformidad con sus actuales políticas el Fondo constituye ante todo una fuente de liquidez condicional.

Se dedica atención a las principales modificaciones en las prácticas del Fondo que podrían ponerlo en condiciones de contribuir más eficazmente a sustentar la tendencia a aumentar de la liquidez international, a hacer que como fuente de recursos se vuelva más adaptable a las necesidades existentes y a contrarrestar cualesquiera tendencias naturales hacia la inestabilidad en el sistema de las reservas. A este respecto se analizan los efectos de ampliar las cuotas en el Fondo, de reformar sus políticas sobre giros, de modificar sus politícas sobre recompras, de variar sus tenencias en oro y de dar mayor alcance a sus operaciones de inversión. Se aduce que los principales métodos para incrementar la liquidez del tipo “reserva” a través del Fondo entrañan ya sea la ampliación de los derechos de giro casi incondicionales hasta abarcar los tramos de credito, o la expansión de sus actividades en el campo de la inversión.

Finalmente, se someten a un riguroso examen los diferentes métodos, tales como el aumento de las cuotas, y varias formas factibles de acuerdos de préstamo (entre ellas la aceptación de depósitos) mediante los cuales el Fondo podría adquirir los recursos que le permitirían poner en práctica esas medidas.


Mr. Fleming, Deputy Director in the Research and Statistics Department, is a graduate of Edinburgh University. He was formerly a member of the League of Nations Secretariat, Deputy-Director of the Economic Section of the U.K. Cabinet Offices, U.K. representative on the Economic and Employment Commission of the United Nations, and Visiting Professor of Economics at Columbia University. He is the author of numerous articles in economic journals.


The general theoretical conception of international liquidity of which the present paper represents a particular application is set forth in an earlier paper by the author, “International Liquidity: Ends and Means,” Staff Papers, Vol. VIII (1960-61), pp. 439-63.


Article V, Section 3 (a)(i).


International Monetary Fund, Annual Report, 1962, p. 31.


Article V, Section 7.


Executive Directors’ Decision No. 102 (52/11), reproduced in Selected Decisions of Executive Directors (Washington, D.C., Second Issue, September 1963), pp. 21-24.


This is merely a probable net effect of influences that pull in opposite directions. More liquidity in the hands of countries with payments surpluses promotes policies tending to reduce surpluses; more liquidity in the hands of deficit countries promotes policies tending to enhance deficits. It is surmised that the latter set of influences will prove the stronger.


See page 181, below.


A member’s “IMF position” is the relationship between its quota and the Fund’s holdings of its currency. Its “gold tranche position” is defined as its quota minus the Fund’s holdings of its currency (if the result is positive); this includes the member’s “net creditor position,” which is that part of its gold tranche position which exceeds 25 per cent of the member’s quota. A member is said to be drawing in “the credit tranches” to the extent that the drawing increases the Fund’s holdings of its currency to a figure greater than its quota; each credit tranche is equivalent to one fourth of the quota. Such a member’s “credit tranche position” is the difference between twice its quota and the Fund’s holdings of its currency.


For drawings under stand-by arrangements.


For other drawings.


The amount a member may draw without a waiver is further limited to the equivalent of 25 per cent of its quota annually. Waivers of this limit are, however, regularly granted if the drawings are otherwise suitable.


See Article IV, Section 8.


Sometimes the drawing country, though not in general accustomed to hold a high proportion of foreign exchange in its reserves, tends to hold in this form a high proportion of reserves acquired from drawings. This makes more likely the outcome described in the following sentences.


What is said here regarding quota increases applies also, grosso modo, to new quotas, which may be regarded as quota increases from a zero level.


The member also acquires contingent drawing facilities under the compensatory financing decision equal, normally, to 25 per cent of the addition to its quota.


This will hold true if, but only if, the expansion of quotas does not outrun the demand for conditional drawing facilities.


This figure is also influenced by the accumulated net earnings of the Fund which, by adding to the Fund’s stock of currencies, tend to reduce the amount of gold tranche positions relative to the Fund’s gold holdings.


The gold transferred is made up of gold subscriptions plus repurchases in gold minus the Fund’s use of gold to replenish its stock of currencies.


I.e., beyond the point where Fund holdings of a member’s currency equal 200 per cent or, if the special compensatory tranche is fully utilized, 225 per cent, of its quota.


In addition to the changes mentioned in the text, innumerable changes are conceivable in the conditions prescribed for drawings and for stand-by arrangements, in the various tranches. To discuss them in detail would yield too little that is relevant to our purpose to justify the space that would be required. However, it is arguable that, if access to Fund resources within the credit tranches were made to depend more on past performance and less on promises of future performance by the drawing countries, with respect to policies of adjustment, countries whose record was good in this respect would be encouraged to regard their drawing rights in the credit tranches as more nearly equivalent to gold tranche drawing rights or gold reserves without there being any loss of the incentive to good behavior associated with conditionally.


The lower figure is based on the assumption that the extension of quasi-automatic drawing rights would lead to no increase in drawings outstanding. The higher figure is based on the assumption that drawings in the credit tranches would be increased by the amount now outstanding in the first 5 per cent of quota beyond the gold tranche.


$600 million is slightly under 1 per cent of present world reserves of gold, foreign exchange, and IMF gold tranche positions, and slightly under 4 per cent of the present level of conditional liquidity, including IMF credit tranche positions (up to the 200 per cent point), the reciprocal credit arrangements of the United States, and an allowance for less formal (Basle) arrangements.


It is assumed that 25 per cent of subscriptions are paid in gold, that the associated reduction in foreign exchange reserves is 6 per cent, and that additional drawings lead to an expansion in gold tranche positions equal to 6 per cent of the addition to quotas.


See the section, Investment by the Fund, page 196, below.


Both (3) and (4) are attributable to the fact that, assuming that the investments are distributed between countries in the same proportions as would be an extension of quasi-automatic drawing rights, countries’ IMF positions will be generally more positive in the former than in the latter case.


See Moorgate and Wall Street, Spring 1961.


The use of gold for purposes of replenishment, which has been discussed in an earlier section, is an intermediary stage in the mobilization of resources ultimately derived from quota subscriptions, repurchases, etc.


It might conceivably be possible to assign currency borrowed by the Fund in advance of use to some reserve account which would not count as normal holdings and would therefore leave unimpaired the drawing facilities of the lending member. Any such reserve holding would, however, in the terminology of this paper, rank as investment, as defined above, and the increase in unconditional liquidity associated with this transaction would result from this “investment” rather than from the borrowing as such.