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.