Abstract
Selections from this paper were delivered at the Annual Meeting of the American Statistical Association, Philadelphia, Pennsylvania, on September 8, 1965.
Oscar L. Altman*
THIS PAPER discusses three major ways of creating international liquidity: increasing official holdings of foreign exchange, principally dollars, under the gold exchange standard; creating reserves in the form of gold tranche positions through the operations of the International Monetary Fund (IMF); and creating reserves in the form of an internationally managed composite reserve unit.1 These three processes illustrate in a general way the creation of international liquidity concurrently with, after, and before the transactions they are designed to finance. Each of them is related to balance of payments deficits at a different point of time. Each of them has a different set of characteristics and a different collection of advantages and disadvantages. Each presents a different problem of management.
I. Reserves Under the Gold Exchange Standard
RATIONALE OF HOLDING OF DOLLARS BY FOREIGNERS
Foreign exchange reserves in the form of dollars are created under present practices as follows: A resident of the United States pays dollars to a foreign individual, commercial enterprise, or bank. If these foreigners elect to keep these dollars, international liquidity is not created. The United States classifies these dollars as short-term external liabilities to nonofficial holders; foreign governments call them by equally formidable names, but do not consider them as part of their international reserves. When dollars are in this form, the United States has no obligation to convert them into gold. If nonofficial foreigners no longer wish to hold these dollars, their central banks will come into possession of them. International liquidity is created at this point, since the dollars are now added to the total of world reserves. If these dollars are subsequently used to buy gold from the United States, this additional international liquidity is destroyed.
It is commonly said that the United States creates the international liquidity with which to finance its balance of payments deficit. It is also said that the U.S. balance of payments deficit is financed by short-term loans made by foreigners. Both these statements are gross simplifications and distortions of the relationship of dollars to the balance of payments and to international liquidity. The first statement is misleading because the United States does not create anything to finance its balance of payments deficit. Its residents transfer to foreigners dollars they already own. If residents do not own enough dollars, they borrow them from domestic commercial banks, which may or may not “create” them for this purpose, or from other sources, domestic or foreign. These transactions do not create international liquidity nor do they in most cases create dollars. The second statement is misleading because foreigners do not, except in one very formal sense, lend anything. Surely, no U.S. resident who holds dollars ever thinks he is lending them to the Government or to the economy of the United States. Why should nonresidents who hold dollars think they are lending them to the United States? A foreign bank keeps a stock of dollars to run its loan and foreign exchange business; foreign monetary agencies use dollars to keep the foreign exchange quotations of their currencies within stipulated limits, to finance fluctuations in their balance of payments, and to save for other purposes. The idea that foreigners who hold dollars are really lending to the United States has gained currency in the last few years for two reasons: first, it has been a very useful slogan in discussing the responsibilities of surplus and deficit countries to make balance of payments adjustments; and second, the concept of lending dollars is a formal associate of the idea that a balance of payments deficit needs to to be financed and that financing means using either liquid assets that are owned or funds that are borrowed.
In reality, the creation of international liquidity in the form of dollars is affected, limited, or “managed,” by five kinds of interlocking decisions: (1) the willingness of the United States to allow its external short-term liabilities to increase; (2) the willingness of the United States to convert dollars into gold for foreign monetary authorities; (3) the willingness of foreigners, other than governments, to hold dollars for their private purposes; (4) the willingness of foreign monetary authorities to hold dollars as part of their international reserves; and (5) the willingness of foreign governments to acquire more international reserves in any form. Creation of international liquidity in this way reflects the separate judgments of tens of governments, thousands of business enterprises, and millions of individuals.
Foreign holdings of dollars have been so belabored since 1958 that it is worth reminding ourselves that dollars are valuable and that residents and nonresidents alike hold them for their own advantage. The dramatic growth of the Euro-dollar market, and the recent development of security flotations outside the United States denominated in dollars, are merely two additional illustrations of the advantages foreigners find in holding dollars. At the end of 1964, foreign commercial banks, nonbanking enterprises, and individuals held $10.6 billion of short-term dollars, having increased their holdings by $700 million a year in the preceding six years.2 These dollars are a prime, flexible asset. Many foreign banks and other business enterprises find dollars indispensable for their business operations. Many individuals consider them a preferred form in which to save or hoard. When it is recalled that short-term rates of interest are lower in the United States than in almost all other industrial countries, and that there are substantial withholding and income taxes on interest earned by nonresidents, the desire to hold short-term dollars is seen in better perspective. It should be noted that the separate and voluntary decisions of foreign business enterprises and individuals to hold dollars do not depend upon the decisions of foreign monetary agencies to hold dollars as part of their international reserves. There can be nonofficial holdings without official ones, as well as official holdings without nonofficial ones. Nonofficial demands for dollars have been so strong that most systems of exchange control have regulated or limited them.
None of the plans for monetary reform discussed in recent years, including those for creating a new composite reserve unit (CRU) to serve as an international reserve asset, is designed to meet this foreign nonofficial demand for dollars. If this demand continues, it will create, or go along with, or be the result of, an annual balance of payments deficit of half a billion dollars or more on the “regular types of transactions” basis heretofore used in U.S. official reporting, though not on the “official settlements” basis recommended in the Report of the Review Committee for Balance of Payments Statistics3 and recently adopted by the U.S. authorities.
At the end of 1964, official holdings of dollars were $15.8 billion.4 About 39 per cent ($6.2 billion) was held by Canada, Japan, and nonindustrial countries that keep from one third to three fourths of their international reserves in dollars; 23 per cent ($3.6 billion) was held by European countries that are now virtually on the gold standard and keep only working balances in dollars; 27 per cent ($4.3 billion) was held by the Federal Republic of Germany and Italy, which keep about 60 per cent of their total reserves in gold but probably would not wish to reduce their dollar holdings to working balance levels;5 and 11 per cent ($1.7 billion) by other countries that keep their reserves roughly one third in gold and two thirds in dollars and sterling. These patterns of reserve holdings have shown considerable stability in the postwar period, and in some cases before 1939; they suggest that the official demand for dollars (as well as for gold and other reserves) depends upon the existing level and composition of reserves and upon which countries have balance of payments surpluses. If balance of payments surpluses are concentrated in Europe, the demand for dollars is low and that for gold is high, as measured in relation to the balance of payments deficit of the United States; if these surpluses are concentrated in all other countries, including the less developed ones, the demand for gold is low and the demand for dollars is high. In the postwar period, with its heavy concentration of surpluses in Europe, the fraction works out to about two thirds gold, after allowance for the growth of gold reserves through the purchase of newly mined gold (and Soviet gold). If the United States is in balance of payments equilibrium on an official settlements basis, it will gain gold and lose dollars, and a modest deficit will be settled in large part by an increase in foreign official dollar holdings. The foreign official demand for dollars appears to be about $500 million a year, if it is assumed that the U.S. deficit is not too large, and that there is an average annual increase in gold reserves from newly mined gold of about $600 million.6
This situation can also be examined from the point of view of the countries that, according to present proposals, might not be invited to participate in schemes to create and hold CRU. Suppose that the CRU arrangement is confined to countries in the Group of Ten7 plus Switzerland. All of these countries, with the exception of Canada, Japan, and Switzerland, hold a large proportion of their reserves in gold, and have correspondingly small official demands for dollars. Such a CRU group would then exclude at least 90 countries which now hold $19 billion of reserves, consisting of $6 billion of gold, $11 billion of dollars and sterling, and $2 billion of gold tranche positions in the IMF. A few of these countries, including Mexico and Venezuela, may increase their gold tranche positions, but most of them cannot be expected to do so. If the countries that are outside the sterling area increase their reserves, they may be expected to acquire both gold and dollars; for example, in the ratio of one to two. If a CRU scheme comes into operation for the Ten, and if the U.S. deficit is reduced to modest amounts, these 90 countries may consider dollars relatively more attractive as a reserve asset and may increase their demands for them.
CREATION OF EXCHANGE RESERVES AND ADEQUACY OF ALL RESERVES
The creation of exchange reserves, and specifically reserves in the form of dollars, has been characterized as haphazard. The gold exchange standard has been severely criticized in recent years as a liquidity-creating mechanism on the grounds that (1) it creates exchange reserves only as a by-product of the deficits of key currency countries, and therefore may create more or fewer reserves than are needed; (2) it cannot continue to create exchange reserves of an unimpeachable and unchanging character; and (3) it destroys reserves as a by-product of the surpluses of key currency countries, and so may act perversely to reduce international liquidity even though there is no indication that world liquidity is excessive. These criticisms are a complex combination of truths, half-truths, and untruths. Nevertheless, there would seem to be little reason to expect that the balance of payments deficits and surpluses of the United States will assist the world at all times to maintain the amount of international reserves it needs.
It is surprising, therefore, to recollect that none of the many plans for monetary reform proposes to do anything about the present level of international liquidity. Most planners assume that the present level is “about right,” while those who consider that it is too high or too low are not sufficiently concerned about the discrepancy to make an issue of it.8 Some countries in continental Western Europe consider that the present level is somewhat excessive; the remaining countries in the Group of Ten, including the United States, consider that on the whole the present stock is adequate; and many less developed countries have not expressed firm opinions on the subject, perhaps because the level of international liquidity is, relatively speaking, one of their minor concerns. The International Monetary Fund, which reflects the consensus of its 103 members, has stated that the present level of international liquidity is adequate.9
It is fair to ask why a reserve-creating process that appears to be so haphazard has resulted in a level of international liquidity described as about right. This result is even more remarkable in view of the many developments in the last 20 years: speedy reconstruction of war damage, high rates of investment and consumption, unusually stable rates of economic expansion, the achievement of currency convertibility (under Article VIII of the Fund’s Articles of Agreement) by all major countries, and far-reaching political change, including the creation of more than 40 new countries and the European Economic Community.10
There is no complete answer to the question of why international liquidity is considered adequate now, but some pertinent elements may be conveniently grouped under four heads.
First, there are many differences of opinion (conceptual, statistical, and purposive) about the need for international reserves, so that any judgment about adequacy or inadequacy of the level of international liquidity would apply only within wide limits. There is a strong tendency, for pragmatic reasons, to consider that liquidity has been adequate if the international system has been working with reasonable efficiency. This tendency is even stronger if (as has been true in the postwar period) the system continues to show strong expansion and development.
Considerably more needs to be known about the characteristics of international liquidity and about what is believed to be an adequate level of international reserves. International liquidity is not one thing but many things: its meaning is broad enough to range from reserves that are owned to those that are borrowed, from resources that are available unconditionally to those available through a wide range of conditionality, and from resources of unlimited usefulness to those of limited usefulness. The elements of international liquidity are constantly changing; some are dying and others are being born.11 Not all the items are additive, and what can be added does not constitute the whole of international liquidity. Some of the elements (such as credit availabilities) can be described but not quantified until after the event.
There is also considerable uncertainty about how much liquidity would be adequate and about the world’s need for international liquidity. Adequacy is measured in relation to objectives which vary from country to country and which change from time to time. The major continental European countries—believing that the balance of payments deficits of the United States and the United Kingdom have been excessive and too long continued—view international liquidity as adequate, if not excessive; the United Kingdom has had great difficulty in improving its balance of payments position permanently and considers that liquidity may be somewhat inadequate; the United States argues that surplus countries have not done enough to reduce their balance of payments surpluses and considers that liquidity is adequate but not excessive; etc. There are many other points of view and objectives. The level of international liquidity may be inadequate for a world without controls on capital transactions, but it may be adequate for a world that considers some controls on capital account to be necessary, if not positively desirable.
Second, many balance of payments deficits are financed by temporary increases in liquidity or by specific ad hoc financing. Liquidity may be created to meet particular problems and eliminated after these have been met. Some deficits arising from short-term capital movements, and from seasonal movements of external receipts and payments, have been dealt with in this way. Members’ drawings from the Fund create liquidity to meet their short-term and medium-term financing problems, and repurchases eliminate this added liquidity.12 The United Kingdom received a substantial amount of ad hoc financing to cope with capital flows under the so-called Basle arrangements in the spring of 1961;13 this assistance was refinanced about six months later by a drawing on the Fund, and the drawing was reversed in July 1962.
Third, international liquidity and the rest of the economic environment are interrelated. The world can easily adjust to different levels of international liquidity, providing the annual changes are not too great. In some cases, relatively small changes which may be made in the composition of asset holdings affect the level of liquidity. There may be minor adjustments in interest rates or in the sources of short-term financing. It would serve no purpose to list the many variables which can contribute to over-all adjustment, but it is important to note that, because there are many variables, none has to carry a large part of the adjustment burden. This is fortunate, since it is practicable to make, or to obtain agreement on, substantial changes in the level and the management of international liquidity only when other economic factors are seriously out of kilter. This may be the case after great wars or political upheavals; or if many of the large industrial countries suffer from widespread deflation and unemployment, which may adversely affect the economic life of the rest of the world; or if the world is tied up in knots of inconvertibility, exchange and capital controls, discriminatory practices, etc. At other times, the economic environment can show tolerable or even excellent progress, so there is a strong tendency to consider that the level of international liquidity is adequate.
Fourth, the amount of international liquidity tends to adjust itself automatically to the need for it.
The U.S. balance of payments deficit, foreign holdings of dollars, conversion of dollar reserves into gold, and, to some extent, private hoarding of gold are interrelated. Foreign demands for liquidity in the form of dollars stimulate the export of dollars in the same way that foreign demands for wheat stimulate the export of wheat. If the dollars are used to build up private liquidity, they may or may not create a balance of payments deficit, depending upon the definition of the deficit. If the dollars are kept officially, to build up official liquidity, they create a balance of payments deficit, and the outflow of dollars is treated as financing the deficit.14 Foreign monetary authorities do not obtain all of their dollars passively. They may not only accept dollars in official settlements; they often take strong steps to acquire them by selling goods and services, or by foregoing the purchase of goods and services, or by borrowing, or by encouraging their nationals to borrow.
To the extent that there is a foreign demand for dollars, the United States could have a balance of payments deficit without losing gold. To be sure, the United States could make these dollars harder to obtain by taking measures to reduce the deficit. Unless this action were, in turn, offset by foreign action, it would lead to a new equilibrium, with a smaller deficit in the United States and smaller increases in foreign holdings of dollars.
There will be points from time to time beyond which further increases in dollars will not be welcome and may be converted into gold. Such conversion has two immediate effects: it reduces the gross reserves of the United States, and it prevents the total of world liquidity from expanding as a result of the U.S. deficit. Conversion into gold by some countries may stimulate conversion by others; and official conversions may stimulate (or be stimulated by) private purchases of gold for hoarding and saving.
It is possible for foreign official holders to have more dollars than they want, but it is hardly likely for nonofficial holders to be in the same position. The question here, however, is what the word “want” means. Foreign official holders might like to reduce their dollar holdings somewhat if they could keep other things equal. They might, for example, reduce their holdings of dollars if this did not interfere with their access to long-term capital markets, or their ability to obtain commercial bank credit, or lead to changes in the U.S. aid or military program. But everyone knows that at any time there is a balance of advantages and disadvantages. In some cases, acquiring additional dollars, which are themselves valuable, may be a very inexpensive way of keeping or acquiring some important advantage.
The discussion up to this point has concerned the expansion of international liquidity by way of a U.S. balance of payments deficit. Recent trends suggest another subject: whether international liquidity need necessarily contract if the United States has a balance of payments surplus. To be sure, if the United States insists upon being paid in dollars, international liquidity will contract.15 On the other hand, if the United States uses its surplus to build up its holdings of the major European convertible currencies, international liquidity will continue to grow precisely because the United States has a surplus. If there is to be any increase in the number of currencies held as exchange reserves by major industrial countries, the United States may have to take the lead by itself accumulating them. Moreover, if the United States developed a balance of payments surplus, it would probably reduce or eliminate its limitations on exports of long-term and short-term capital. Gold might also become relatively less attractive as an asset for hoarding.
International reserves could thus continue to increase in spite of, or by reason of, the balance of payments surplus of the United States. The amount of liquidity that might be added to world reserves in this way may be suggested by the calculated results of the willingness of the United States to hold (say) 60 per cent of its reserves in gold and the balance in foreign currencies and reserve position in the Fund, i.e., the reserve composition of Germany and Italy at the end of June 1965. If the United States, when in surplus, were to follow such a policy and have no inflow of gold, it would acquire $7.5 billion of foreign currencies and a gold tranche position of $2.5 billion in the Fund.16 Even if the world demand for reserves by developed and developing countries were to continue at its present high rate—and there is some possibility that the demand within the European Economic Community could decrease as economic integration proceeds further—such a policy could provide all the reserves the world might need for some years.17
II. Reserve Positions of Members in the IMF
Under the gold exchange standard, there is no central management of international liquidity as there is of the domestic money supply by central banks. Instead, increases and decreases of international liquidity are the result of separate and decentralized decisions by monetary authorities, banks, other business enterprises, and individuals to increase or decrease cash balances, to switch from one currency to another, and to apportion holdings between gold and foreign exchange. In such a system, it is appropriate to conceive of liquidity as ranging from the hardest kind of owned reserves to the vaguest kind of credit facilities.18
Every government has a mandate to use owned reserves carefully and responsibly. These are the same criteria that determine a country’s access to credit facilities. The more of its owned reserves a monetary authority spends, the more difficult it is to spend more; and correspondingly, the more it has borrowed, the harder it is to borrow more. Thus, if a monetary authority has spent a large amount of its owned reserves, it may be easier to borrow than to draw down owned reserves further. In the same way, if a monetary authority has borrowed a large amount, it may be easier to spend some owned reserves than to continue borrowing. There have been many occasions in recent years when monetary authorities have felt that the brunt of the pressure of the balance of payments should be met by borrowing rather than by drawing down owned reserves, since the latter course encourages snowballing speculation. But in general, owned reserves can go further if they are used pari passu with borrowed reserves. Such a policy is preferable to one of holding off borrowing until danger signals have been created. Whatever policies are followed by countries in this respect, it remains true that the IMF is a major international source of reserves, and that the reserves it provides have a very high efficiency in that they are pinpointed to areas of strain.
The liquidity operations of the IMF are best characterized in terms of unconditional and conditional liquidity. The Fund creates both kinds of liquidity, although in a basic sense its Articles of Agreement do not envisage or permit it to give up the right to refuse a drawing in some circumstances. Any member that wishes to draw on the Fund must show a need to do so. As a matter of long continued practice for certain amounts of drawings, this requirement is satisfied when a country represents or alleges that it needs to draw. Since 1952, the Fund has accorded the overwhelming benefit of the doubt to representations of need applied to drawings within the gold tranche. Although such representations can be challenged, there has been no instance of challenge, formal or informal. This situation is described by saying that drawings within the gold tranche are virtually automatic.
Drawings beyond the gold tranche are conditional. These conditions are designed to assure that the drawing country can make effective use of the resources drawn from the Fund and be able to repay the Fund in not more than three to five years.
The Fund is an open-ended instrument for creating liquidity. Its Articles of Agreement place no limit on the amount of its resources. On the contrary, members can request quota increases at any time; the Fund is required to review member quotas every five years; and the Fund can borrow additional amounts of the currencies it needs from members or from nonmembers. The Fund is currently in process of increasing member quotas from $16 billion to $21 billion as a result of a general quota increase of 25 per cent and a number of selective quota increases.19 If members had wished, they could have increased Fund quotas to $30 billion, or $40 billion, or more. There is no formula to limit—or to compel—increases in quotas. The Bretton Woods agreement, setting up the Fund, does not contain a formula for calculating quotas, although an early draft of the agreement had one and Keynes’ proposal for an International Clearing Union had another. Despite the adoption of two general quota increases and many individual ones,20 the Fund has not officially adopted any formula for calculating quotas. The so-called Bretton Woods formula had no official status at Bretton Woods in 1944, although it was used informally to determine the order of magnitude of the quotas of many of the 44 countries there represented. This original formula, and some improved and modified versions of it, suggest that the total of Fund quotas should now be of the order of $40 billion and that, with reference to the criteria which many delegations had in mind in 1944, the Fund is now only half as large as it should be. Given existing policies with respect to drawings, the Fund could double its creation of unconditional liquidity and of conditional liquidity if quotas were increased to $40 billion. Even with its prospective quotas of $21 billion, the 103 members of the Fund could greatly increase either conditional or unconditional liquidity by modifying its policies on automaticity and by liberalizing its policies on drawings.
Liquidity in the form of unconditional and conditional drawing rights on the Fund may be visualized in the form of commercial banking operations. For example, the process starts when country A with a quota of $100 pays to the Fund $75 of its own currency and $25 in gold and acquires a gold tranche of $25 plus a potential on which to draw. The level of world reserves is unchanged by this gold payment,21 but the composition of A’s reserves has been modified. When country B draws on the Fund, the effect of this drawing upon the level of world reserves depends upon a number of factors, including (1) the Fund’s currency holdings, with respect to quota, of the member that draws as well as of the member whose currency is drawn and (2) the currency that is drawn. Other things being equal, drawing a key currency increases liquidity more than drawing a non-key currency and then converting it into a key currency. In a few cases, Fund drawings may not increase international liquidity at all. But as a general matter, it may be said that drawings by members commonly result in immediate increases of the same amount in the level of world reserves, and that drawings increase unconditional liquidity at the same time that they decrease conditional liquidity.
Drawings from the Fund are based upon the balance of payments deficits of individual countries. Even when a country draws within its super gold tranche—i.e., its creditor position—it must have a need to draw; and the Fund expects that all drawings, except those in the super gold tranche, will be repaid in not more than three to five years. This repayment period represents current Fund policy; there is nothing in the Fund Agreement to prohibit the Fund from asking for repayment in a different period, for example, in two to three years or in five to seven years. If Fund policy were to shorten the repayment period, the Fund would more and more become a vehicle for financing seasonal, cyclical, and other very short-term fluctuations in the balance of payments. If Fund policy were to lengthen the repayment period, Fund operations would more and more take on the characteristics of a medium-term or long-term investing agency. But whatever the length of the repayment period, the Fund would have to be repaid, and members would in any case be subject to its automatic repurchase provisions.22
Is it possible for the Fund to increase international liquidity year after year by making loans which must be repaid? The answer to this question is yes; and, indeed, every national banking system expands the domestic money supply on this principle. Double entry book-keeping—as well as morality in politics—requires that the monetary authority create and distribute money only when it receives a quid pro quo, which normally consists of the notes, loans, and bonds of governments, business enterprises, and individuals. These obligations are rolled over from time to time, and some units reduce their obligations while others may increase them, but the process is managed so that domestic liquidity is increased.
In the same way, the operations of the Fund can create secular increases in liquidity. The difference between increasing liquidity through drawings repayable in three to five years and increasing liquidity through drawings with a longer repayment period is a difference of degree but not of kind, although a country may not be willing to borrow for three to five years but may be willing to do so for a longer period.
Whether and to what extent the Fund was designed at Bretton Woods to make resources available automatically, i.e., to provide the international monetary system with large amounts of unconditional liquidity and relatively small amounts of conditional liquidity, is an interesting historical question. There was certainly no intention at Bretton Woods to make it possible for all members to draw all of their quotas automatically. The Fund’s Articles provide that the Fund must specifically authorize a waiver to permit any member to draw more than 25 per cent of its quota a year, or to draw in total more than 125 per cent of its quota.
Since the adoption in 1952 of its present drawings policies,23 the Fund has considered that all drawings within the gold tranche are virtually automatic. In 1959, it made drawings by members to acquire foreign exchange to finance their gold subscriptions in connection with quota increases virtually automatic;24 and in 1962, it made drawings to provide compensatory financing for temporary export shortfalls up to 25 per cent of quota virtually automatic.25 Along with these changes in drawings policies have gone decisions to increase the over-all size of the Fund less rapidly than might have been expected on the basis of the criteria used at Bretton Woods, and an inability to adjust the quotas of many large countries in continental Western Europe to levels more in accord with their international reserves and present economic positions. But the Fund continues to operate on several basic premises: members may draw only if they have a balance of payments deficit; their ability to draw is a conditional one, subject to the discretion of the Fund; some drawings have been made virtually automatic (unconditional) as a matter of Fund policy; and all drawings, except those in the super gold tranche, must be repaid in not longer than three to five years.
III. Creating Reserves in the Form of Composite Reserve Units
There has been much discussion in the last two years about the desirability of an internationally managed reserve asset that countries can own and can create and distribute without respect to any country’s balance of payments deficit. A number of proposals for a composite reserve unit (CRU) have been made. These proposals have certain common characteristics, two of which should be noted here. First, agreed amounts of CRU would be created by a group consisting of a relatively small number of countries, such as those in the Group of Ten, which may be expected to exercise balance of payments discipline. Second, the amount of CRU to be created would depend upon the group’s collective appraisal of the world’s need for reserves; and the initial distribution of CRU would be made to each participating member according to some agreed formula without reference to its balance of payments position.26 According to some proposals, the Fund would be a member of the group, taking part in decisions and receiving CRU in exchange for its promissory note; according to other proposals, the Fund might act as trustee and supervise the readjustment of CRU holdings by members of the group. The discussion in this section applies to these proposals. It does not, however, necessarily apply to the proposals made by Robert V. Roosa in his book, Monetary Reform for the World Economy, which was published after this paper was written.
All CRU schemes include or imply some limitation on the ability of the United States and the United Kingdom to finance, with dollars and sterling, their deficits with other members of the group. This limitation follows from the view that additions to international liquidity in the postwar period have depended excessively upon the balance of payments deficits of the United States, that these deficits must be reduced drastically or eliminated, and that a U.S. surplus would reduce reserves without any indication that the global need for reserves had decreased. Sterling is usually linked with the dollar in this respect, even though only a small amount of sterling has been added to international reserves in the last 15 years. Sterling is included on the grounds that the total amount of sterling in international reserves is large and that, as a key currency, it has a potentiality similar to that of the dollar. The ability of key currency countries to meet their balance of payments deficits partly in their own currencies is believed to give them an unfair advantage in international settlements, and even more so if these deficits are thought to be the result of direct and portfolio investment abroad.
The limitation via CRU upon the ability of key currencies to finance deficits might be reached in many ways. One would be an agreement by all participating members not to increase their official holdings of the currencies of other members, except for required increases of working balances. Such an agreement would require each member to ask for full conversion of official dollar and sterling receipts into gold and CRU, and imply that CRU would supplement gold but would replace foreign exchange in reserve settlements among the participants. A CRU scheme would replace not only the dollars (and the small amounts of sterling) which members of the Group of Ten have acquired or may acquire; it would also prevent the United States from acquiring the foreign currencies that it might be willing to acquire if it developed a balance of payments surplus.
All the CRU schemes proposed to date involve a number of compulsions that are not present in holdings of foreign exchange; e.g., CRU must be held in reserves in some stated proportion to total reserves, or to gold and foreign exchange, or to gold; CRU could be used to settle balance of payments deficits only in some stated proportion to gold; and CRU would not be convertible into gold, nor could it be used directly to buy gold. In all schemes that relate holdings of CRU to holdings of gold, a country that held no gold would not have to hold CRU; but if the initial distribution of CRU were related to gold, a country would not receive any CRU unless it had gold. CRU limits the freedom that countries now have to keep their reserves in whatever form they wish and to change the composition of their reserve assets from time to time. Members of the CRU group could hold working balances in foreign exchange, but they would be under pressure to increase the gold portion of their reserves, and even more so if newly created CRU were distributed in relation to gold. This tight relationship of CRU to gold for both reserves and payments has led some to characterize CRU schemes as a disguised increase in the price of gold.
CRU, though limited in quantity and guaranteed as to gold value, is not so attractive a reserve asset as either gold or dollars. To make CRU work, members would have to agree to hold it; they would hold it because they would have to and not because they preferred it to gold. The gold guarantee attached to CRU would not, it appears, make it a more attractive reserve asset than dollars, which can be used for both reserves and transactions purposes and which can be invested to yield a return. But dollar and other foreign exchange holdings have elements of instability, since holders may shift from one currency to another currency, or to gold. CRU would be inconvertible. This would eliminate the problem of instability that arises from the cheap and unlimited interconvertibihty of gold and dollars. To compensate for this, holdings of CRU would have to be made compulsory and gold guaranteed.
CRU schemes are also based upon the proposition that its quantity should be increased (or decreased) on the basis of global needs for international liquidity, and that new CRU should be distributed—according to some prearranged formula—to the countries within the group creating it, without reference to their individual balance of payments situations.
There are a number of basic differences among the processes of creating international liquidity via CRU, Fund operations, and the gold exchange standard:
(1) When is liquidity created? CRU would be created in anticipation of balance of payments deficits. Dollars are transferred to foreigners at the time that transactions take place; balance of payments deficits come into being when these dollars are transferred to foreign monetary authorities. Reserves in the form of gold tranche positions in the IMF are usually created after the deficit has been incurred.
(2) On what terms is new liquidity distributed? Members of the CRU-creating group would own the CRU distributed to them.27 When members of the Fund draw additional reserves in the form of members’ currencies, they are actually borrowing and they have to repay later. Even a member that draws the portion of its gold tranche that is equivalent to its gold subscription has later to reconstitute its position. The only drawings from the Fund that need not be reversed are those representing credit that some members have extended to other members through the Fund, i.e., the super gold tranche. Reserves of foreign exchange resemble CRU in that they are owned, but they differ from CRU in that they must be earned or borrowed.
(3) How can new liquidity be used? Owners of CRU could use it to finance balance of payments deficits of any size and origin. The only limitation would be that CRU would have to be spent and/or would have to be held in some fixed relation to gold or to reserves. Foreign owners of dollars can use them without conditions to make any payments denominated in dollars, and they can convert dollars into any other currency or into gold to make any other payments. As already noted, access to reserves through the Fund is more or less conditional. Members must have a need to draw and must assume an obligation to repay (except in the super gold tranche). Moreover, they can borrow only for the purposes stated in the Articles of Agreement and in the Fund’s policy on the use of its resources. It is true that the element of conditionality sits lightly in many cases, and that it is hardly visible in drawings within the gold tranche, since the member is then given the overwhelming benefit of the doubt with respect to his request. But when a member draws a substantial part of its quota, or appears to suffer from strong elements of domestic imbalance or fundamental disequilibrium, the Fund’s conditions can become severe.
On the whole, drawings from the Fund have become more automatic since its first operations in 1947, while that part of members’ drawing potentials that is conditional has become, as might be expected, more predictable in view of the large number of precedents that have been built up in 18 years of operations. But there has always been a substantial body of opinion that would make the Fund more automatic. For some time E.M. Bernstein has advocated a policy to make annual drawings of 25 per cent of quota fully automatic up to a limit of 200 per cent of quota, and Sir Roy Harrod has recently proposed that quotas be renamed deposits, and that members be given the right to spend all their deposits unconditionally, subject only to annual consultation and review with the Fund.28
Proposals for CRU raise some hard issues of advantage and disadvantage in comparison with other methods of creating and managing international liquidity. They appear to be simpler than other methods, but in fact they are not.
It is not an accident that all proposals for CRU have related to a small number of countries, such as the Group of Ten, with or without Switzerland or the Fund, or the Group of Ten increased by a small number of countries. No proposal has been made to include 50 or 75 countries, or all of the 103 countries that are members of the IMF. Even proposals for “CRU in the Fund” have involved criteria which would result in limited participation.
The reason for limiting membership to a small number of countries—chiefly developed countries—is based upon certain assumptions as to their international economic behavior. CRU is conceived as a liquidity mechanism: developed and wealthy countries need substantial international reserves and feel themselves constrained or poor if they do not have them. They do not, however, desire additional reserves because they want to acquire real resources from, or investments in, other countries. They wish the freedom of action that comes with having larger cash balances, but do not intend those larger cash balances to have a permanent effect on their demand for real resources. The proponents of CRU expect that deficit countries in the CRU group will not spend the newly created CRU to expand their deficits permanently, and that surplus countries will not reduce their surpluses permanently simply because CRU is distributed to them. It is expected that the international reserves of CRU members will be increased, that their reserves will fluctuate around this higher level, but that there will be no one-time spending spree which will reduce reserves to their present levels.
On these assumptions, it is possible to think about creating liquidity in advance of need and distributing it unconditionally to a small number of countries. The number is small because most countries other than those in the small group are chronically short of international reserves. The fact that most of the less developed countries prefer more economic development to larger bank balances is understandable, but it implies that, if they were given additional international reserves unconditionally, they would consider them as additional capital and proceed to spend them. It is argued that these countries did not accumulate adequate international reserves when they had to buy them with a balance of payments surplus, and that there is no reason why they would wish to hold reserves which come to them without effort, in the form of CRU. If they were given additional reserves, their balance of payments discipline would be weakened, and industrial countries would find themselves buying back with larger exports of goods and services the newly created reserves given to the less developed countries. Furthermore, if the less developed countries were made participants in a CRU scheme, they might find the CRU route a most attractive highway to economic development and vote for annual increases of CRU in excess of global needs for liquidity. Hence, advocates of CRU consider that all countries cannot be made participants in the CRU process. Nevertheless, some have been troubled by the discriminatory character of these conclusions, as well as the morality of giving additional liquidity to those countries which need it the least, and have considered giving compensating advantages in other areas to countries excluded from the CRU scheme.
Some questions about the danger of creating reserve assets and giving them away unconditionally nevertheless remain. The assumption that higher levels of international liquidity will have little effect upon international patterns of consumption and investment is not one that would command agreement in an analysis of any one country. Within anyone country, proposals to create additional money, and to give it away to all residents in proportion to their present cash balances (or in reverse proportion to those balances), would surely be considered both inflationary and discriminatory.29 Hence, there appear to be some rather subtle built-in limitations to the expansion of international liquidity by way of schemes to create CRU, whether inside or outside the Fund. The requirement that CRU can be created only if the decision is that of a very large majority of the participants, or is unanimous, could make the CRU mechanism restrictive rather than expansionary. This would follow even more if the agreement on CRU should require limiting or abolishing the role of other reserve assets. Moreover, the size of the CRU scheme may be an important index of its character. A small-sized CRU may be characterized as experimental when it is in reality restrictive.
IV. Conclusion
International liquidity would be easier to manage if it had some clear, invariant, one-way relationship to world trade and the balance of payments. But there is no such relationship—or if there is one, it has never been discovered. The conception of the nature of international liquidity has broadened considerably in recent years, but in the process of becoming more meaningful it has become less measurable. Similarly, the term “adequacy of reserves” has different meanings, many of which are related to particular points of view and purposes. If national differences of interest and purpose were narrow, this would have little significance. The great differences that are now present among the Group of Ten, as well as between them and other countries, make agreement difficult.
Proposals for reforming and managing international liquidity, including the creation of new reserve assets, begin with the proposition that there is a total of international liquidity which is measurable, and that this total should be expanded from year to year in accordance with the growing need for it. There is a range of views about the adequacy of international liquidity, but no agreement on how to determine the level that is adequate at any particular time and by how much to expand it from year to year. The range does not appear to be very wide at the present time, and the consensus is that the present level is adequate. This is probably both an economic and an operational conclusion. Some may interpret it as a view that international liquidity is not seriously inadequate, or even that international liquidity is adequate because countries cannot agree to make a substantial one-time adjustment of the present total of reserves.
But, as the Fund stated in its 1965 Annual Report, “Even if there is no need for immediate action to create additional reserves, it is nonetheless important to consider well in advance the many problems of principle and technique that would present themselves if the necessity for such action should arise.”30 It is fortunate that there is time to do this. Many difficult economic questions remain to be clarified, and some of these must inevitably be handled by trial and error. The choice between different proposals—proposals which are really different packages of advantages and disadvantages, and different systems of control—is by no means clear.
There are two principal ways of creating international reserves, other than gold, at the present time. The first is through the mechanism of the gold exchange standard, using key currencies, principally dollars. The second is through the operations of the International Monetary Fund. Countries now hold reserves through the Fund, in the form of gold tranche positions, totaling $5.3 billion, of which about one half originated from the Fund’s operations. The Fund mechanism is now well seasoned, and if Fund members wished to do so, they could operate it to produce much larger amounts of gold tranche reserves and conditional liquidities.
The amount of exchange reserves created by the U.S. balance of payments deficit, in conjunction with the gold exchange standard, has been very large in the postwar period. This process has been criticized as haphazard, since there is no assurance that the amount of reserves so created will be correct for world needs. At the present time, there is the opposite fear that a balance of payments surplus of the United States will reduce world liquidity below global needs for it. But the process of creating exchange reserves is less haphazard than it appears to be. This may explain the general consensus that liquidity is adequate at the present time—after a generation of rapid and sustained economic growth and far-reaching political changes.
It is useful to consider not only how centralized management might act in the future but also how it might have acted in the past.
The creation of reserves through the gold exchange standard and the operations of the Fund is related to the balance of payments deficits of individual countries. The last few years have seen a number of proposals for a new reserve asset, the CRU, which can be created in response to global needs and distributed to a limited number of countries without respect to their balance of payments positions. The CRU mechanism combines a set of advantages and disadvantages to individual countries which differ from the mechanism of the gold exchange standard and the operations of the Fund. It has the advantages of centralized international management, stability, and independence of the balance of payments situation of any one country; it has the disadvantages of rigidity, discrimination, and high voting majorities, and it could turn out to be very restrictive. One real test of the CRU mechanism would be whether its members could agree to create substantial amounts of CRU without being stopped if several member countries should disagree.
La liquidité internationale et la balance des paiements
Résumé
Il existe à l’heure actuelle deux manières principales de créer des réserves internationales d’un caractère inconditionnel: 1) par le mécanisme de l’étalon de change-or, en utilisant des monnaies-clés, principalement des dollars; 2) par les positions de tranche-or au Fonds Monétaire International. Mais une troisième solution a été proposée récemment, à savoir la création d’unités de réserve collectives (C.R.U.) administrées sur le plan international. Chacun de ces trois processus se rattache aux déficits de balance des paiements à un point chronologique différent; chacun présente un certain nombre de caractéristiques, d’avantages et d’inconvenients différents; et chacun pose un problème de gestion différent.
Ces trois processus sont analysés en détail dans cet article. L’auteur soutient que ceux qui se rattachent à l’étalon de change-or et au F.M.I. réduisent dans une mesure considérable le risque de pénurie de liquidités internationales; il souligne également que l’accord est loin d’être général quant au montant de réserves internationales pouvant être jugé suffisant à un moment quelconque.
Après avoir examiné les avoirs étrangers en dollars, la demande de dollars, et l’évolution de la balance des paiements des Etats-Unis, l’auteur arrive à la conclusion que la perspective d’une réduction des liquidités par suite d’une diminution des avoirs en dollars n’est pas à craindre.
Le Fonds peut ajouter constamment aux liquidités internationales, bien que ses règlements exigent qu’un rachat soit effectué dans un délai de trois à cinq ans. La liquidité ainsi créée est dirigée là où elle fait défaut puisqu’elle l’est pour répondre aux difficultés de balance des paiements des membres du Fonds.
Bien que limitée en quantité et garantie quant à sa valeur-or, l’unité de réserve collective ne présente pas les attraits de l’or ou des dollars, parce que tout accord visant à sa création en exigerait également la détention par les membres. Toutes les propositions avancées jusqu’à présent à cet égard se rapportaient à un petit nombre de pays développés qui, comme on peut le prévoir, ajouteraient ces nouveaux avoirs à leurs réserves. L’auteur fait remarquer qu’un tel dispositif (C.R.U.) aurait un effet restrictif et non expansionniste, particulièrement si les décisions nécessaires à sa création dépendaient d’une majorité très élevée, ou de l’unanimité, des membres du groupe.
La liquidez internacional y la balanza de pagos
Resumen
En la actualidad existen dos modos principales de crear reservas internacionales de carácter condicional, a saber: (1) por medio del mecanismo del patrón de cambio oro, utilizando las monedas clave, sobre todo el dólar, y (2) por medio de las posiciones del tramo de oro en el Fondo Monetario Internacional. Hace poco se propuso otra manera más—la de una unidad colectiva de reserva (UCR) que sea administrada internacionalmente. Cada uno de esos tres medios se relaciona con los déficit de la balanza de pagos en un momento distinto del de los demás; las características, ventajas y desventajas que cada uno reúne son disímiles, y cada cual de ellos constituye un problema diferente en materia de cómo administrarlo.
Este artículo examina minuciosamente los tres procedimientos. Sostiene que los métodos vinculados al patrón de cambio oro y al FMI disminuyen considerablemente el riesgo de que escasee la liquidez internacional, y además señala que existen notables discrepancias de opinión acerca de lo que pudiera considerarse como un nivel adecuado de reservas internacionales en cualquier momento determinado.
Después de examinar las cuestiones relativas a las tenencias extranjeras de dólares, la demanda de esta moneda, y la evolución de la balanza de pagos estadounidense, se llega a la conclusión de que puede hacerse caso omiso de la posibilidad de que la disminución de las tenencias en dólares provoque una declinación en la liquidez.
El Fondo puede contribuir de modo continuo a la liquidez internacional, a pesar del hecho de que sus reglamentos exigen que los reembolsos se efectúen dentro de un plazo de tres a cinco años. La liquidez así creada se circunscribe a los puntos que se encuentran bajo tensión, dado que su objeto es atender a las dificultades de balanza de pagos que los países miembros experimenten.
La UCR, aunque la cantidad sea limitada y sea garantizada en cuanto a su valor en oro, no resulta tan atractiva como el oro o el dólar, ya que cualquier convenio para su creación impondría también que los miembros la conserven entre sus tenencias. Todas las propuestas que se han presentado hasta ahora en relación con la UCR se han referido a un reducido número de países desarrollados que, según se pretende, agregarían los nuevos activos a sus reservas. Se indica que el mecanismo de la UCR puede ser más bien restrictivo que expansionista, máxime si las decisiones de crearla dependen del voto emitido por mayorías muy grandes o del voto unánime de los países que integren el grupo.
Mr. Altman, Deputy Director of the Research and Statistics Department, and Fund Historian, is a graduate of Cornell University and of the University of Chicago. He taught economics at Ohio State University and was on the staff of the National Resources Planning Board and of the French Supply Council. He was Director of Administration of the Fund until 1954. He is the author of Savings, Investment, and National Income and of a number of papers published in technical journals.
There have been many proposals for composite reserve units, and some initial proposals have subsequently been modified. This paper concentrates upon the essence of these proposals and disregards their differences.
The average annual increase since 1950 has been about $500 million. These dollar balances, through a series of redepositings and lendings, may have supported much larger amounts of assets and liabilities denominated in dollars.
The Balance of Payments Statistics of the United States: A Review and Appraisal (Report of the Review Committee for Balance of Payments Statistics to the Bureau of the Budget, April 1965).
Including $1.4 billion of nonmarketable securities denominated in foreign currencies and in dollars.
Germany’s owned reserves of $7.5 billion consist of gold (59 per cent), foreign exchange (27 per cent), and gold tranche position in the Fund (14 per cent). Italy’s reserves are $4.0 billion, and the percentage distribution is 59, 31, and 9, respectively.
See O.L. Altman, “Quelques aspects du problème de l’or,” Cahiers de I’lnstitut de Science Economique Appliquée (Paris), July 1962; Poul Høst-Madsen, “Gold Outflows from the United States, 1958-63,” Staff Papers, Vol. XI (1964), pp. 248-61.
Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States.
Even some of those who most seriously propose an increase in the price of gold do not suggest increasing the stock of liquidity, but rather using revaluation profits to reduce reserve holdings of dollars and sterling. See, for example, “The Case for Going Back to Gold,” by M.A. Heilperin, in World Monetary Reform: Plans and Issues, ed. by Herbert G. Grubel (Stanford, California, 1963), pp. 329-42.
Annual Report, 1965, Chap. 2, and the comment, “It is widely agreed that there is no urgent need for supplementing the volume of reserves” (p. 15); Annual Report, 1964, Chap. 3, and the comment, “On the occasion of the last Annual Meeting of the Board of Governors of the Fund, it appeared to be generally agreed that international liquidity was adequate. The studies which have been in process during the year have not led to any different conclusion” (p. 29). It may be objected that these views reflect the characteristics and responsibilities of the Fund as it is now constituted. There is no reason, however, to believe that its views would be different if its charter had been revised to convert it into an international central bank charged with maintaining an appropriate level of international liquidity.
It would also appear to be difficult to conclude that the level of international liquidity was inadequate during the last 20 years. For example, the IMF report, International Reserves and Liquidity (Washington, 1958), recommended an increase in Fund quotas but no other changes in the level of international liquidity; and Robert Triffin’s proposals in Gold and the Dollar Crisis (New Haven, 1960) dealt with improving the stability and managing the future expansion of international liquidity but not with remedying any inadequacy at that time.
Several new types of reserve assets have been invented recently. There have been the so-called Roosa bonds, which are now held by 6 countries in the amount of $1.5 billion; of these, $1.1 billion are denominated in the currency of the creditor and are thus free from the risk of loss should there be a devaluation of the dollar. A network of swap transactions between the United States and many other countries has been created and in many instances been drawn upon; this network improves international liquidity, but the stage at which the amount of swap transactions should be added to totals of international liquidity is not clear. Finally, a gold tranche position in the Fund has gained general acceptance as a reserve asset that should be added to holdings of gold and foreign exchange.
The amount of liquidity created or eliminated depends upon a number of factors, some of which are discussed in section II of this paper.
See International Monetary Fund, Annual Report, 1962, p. 99.
Nevertheless, there is clearly a conceptual difference between the situation when country A, wishing to increase its holdings of dollars, reduces its imports from the United States, and that in which the United States increases its imports from A and pays out dollars which end up in A’s official reserves. Both cases contribute to a balance of payments deficit, and the contribution is measured by the increase in A’s official dollar holdings. But since the cause of the deficit is different, the policy to cope with the deficit may also be different. This is not necessarily an argument for measuring the deficit differently—adjusting it for the foreign official demand for dollars. This would be difficult, as it would involve analysis of the motives behind changes in official holdings of dollars. But different inferences may legitimately be drawn in the two cases.
It may contract by more than its surplus if members of the sterling area pay with gold that they purchased from Britain with sterling, or members of the French franc area pay with gold that they purchased from France with francs.
These figures for the United States assume gold holdings of $15 billion, equal to 60 per cent of its reserves, and foreign currencies and gold tranche position equal to 30 and 10 per cent, respectively. A gold tranche position of $2.5 billion for the United States assumes that other members of the Fund will draw dollars totaling $1.2 billion.
These proposals were discussed by Mr. R.V. Roosa when he was Under Secretary of the U.S. Treasury; see “Assuring the Free World’s Liquidity,” in World Monetary Reform (cited above, fn. 8). There is no implication here that they were or are U.S. policy. The present writer noted in an earlier paper that “under the Roosa Plan, countries can operate with exchange reserves consisting of many currencies only if all countries together act as they do now collectively in the IMF, or if the United States is willing to act unilaterally, on a large scale, like the IMF in acquiring and spending currencies other than the dollar”; see O.L. Altman, ‘The Changing Gold Exchange Standard and the Role of the International Monetary Fund,” Banca Nazionale del Lavoro, Quarterly Review (Rome), June 1963, p. 22.
It is inappropriate, however, to go further and to characterize owned reserves as those that can be used unconditionally and borrowed reserves as those that can only be used conditionally. This characterization confuses the way of obtaining reserves with the way of using them.
See International Monetary Fund, Annual Report, 1965, pp. 124-32.
Ibid; also Annual Report, 1959, pp. 185-89.
This refers to the level of unconditional liquidity. The amount of conditional liquidity is undoubtedly increased.
The repurchase provisions are stated in the Fund’s Articles of Agreement, Article V, Section 7. In general, a member is required to repurchase its own currency from the Fund (without reducing the Fund’s holdings below 75 per cent of its quota and without raising the Fund’s holdings of the tendered currency above 75 per cent of that member’s quota) to the extent of one half of the increase in its reserves each year.
See Annual Report, 1952, pp. 87-90, and Selected Decisions of the Executive Directors and Selected Documents (Washington, 1965, hereafter cited as Selected Decisions), pp. 21-26; also Annual Report, 1965, p. 123, and Selected Decisions, p. 49.
This policy applied to quota increases under the First and Second Resolutions, i.e., to the general quota increase of 50 per cent and to the special increases for countries with small quotas. The Fund re-examined and confirmed this policy in 1961 and 1965.
See Annual Report, 1963, pp. 196-99, and Selected Decisions, pp. 40-43.
Other characteristics would include the following: (1) The value of CRU would be bolstered with a gold guarantee. (2) Participating countries would be required to hold CRU in their reserves according to some uniform agreed formula, e.g., as a stated proportion of gold or of total reserves. Each participating country could use CRU to meet its gold payments to other participants in some stated proportion to gold; and, correspondingly, each would be required to accept CRU in lieu of gold in this same proportion. CRU would not be used in transactions with members outside the group. (3) Virtually all proposals to date for a CRU-type reserve have required that a large majority within the group of countries would create and distribute it, and at least one proposal has required unanimity. (4) CRU is envisioned as a liability of, or a claim on, a designated trustee, who would hold as counterpart assets an equal amount of national currencies paid over to him by countries in the group. From the point of view of the trustee, this is equivalent to issuing warehouse receipts against a group of currencies; from the point of view of each participating country, this is equivalent to buying an international currency with domestic money.
In all the CRU schemes proposed to date, members would deposit their own currencies; if the IMF were to be made a member of the group, it would deposit its own promissory note. In fact, CRU schemes could be started, and they would work just as well, if currencies were not deposited.
Reforming the World’s Money (London and New York, 1965), Chap. 5.
It would indeed be inflationary except in periods of drastic unemployment and economic disequilibrium. All such proposals for domestic action would surely be characterized as schemes to introduce fiat money. The money supply within any one country is based upon monetization of the debts of government, business enterprises, and individuals. These are overwhelmingly the debts, i.e., the balance of payments deficits, of residents.
Annual Report, 1965, p. 19.