Voluntary Acceptance of Transfer

In theory such willingness might be purely voluntary and based on the attractiveness of holding the claims. In practice, however, it would almost certainly have to be backstopped by the assumption, on the part of a sufficient number of countries, of definite legal obligations to accept transfer. If transfer were purely voluntary for the transferee as well as the transferor, the value of the claims in terms of gold and the principal currencies would not tend to remain at any particular parity but would fluctuate in response to changes in the rate of interest paid on the claims relative to that paid on other reserves, and to changes in speculative anticipations about the future values of the claims. In order to prevent such fluctuation in value—an unwelcome characteristic for a new reserve asset—claims could be transferred only at a fixed ratio to gold or currencies. The result of such price fixing on a free market, however, might be that in some circumstances the claims would find wide acceptance and could therefore be used without difficulty, while at other times, countries holding them would be unable to dispose of them at need.

To avoid this result, it has been suggested that the right to transfer on a voluntary basis should be ensured by an obligation on the part of the issuing institution to convert the claims into gold or currency at fixed rates. Under this system, however, at times the claims might pass freely from country to country without conversion at the issuing institution, and at other times (especially if the liquidity of the issuing institution was itself in question) substantial conversions might take place. These conversions would force the institution to realize its assets or counterclaims with the unfortunate result of bringing about a net destruction of reserves at the very time when reserves were most required. Moreover, the institution might not be able to avoid calling for the encashment of claims on countries whose own balance of payments positions were insufficiently secure, and this hazard to the debtors of the institution would tend to offset from the start the liquidity value of the reserve creation.

Obligatory Acceptance of Transfer at Par Vis-à-Vis Domestic Currency

An alternative system which suggests itself is one in which countries are both free to transfer claims and obliged to accept them to an indefinite extent. Such an obligation, however, is meaningless unless it specifies both what is to be provided in exchange for the claims and the rate at which the exchange is to take place. The obligation to purchase claims might be couched in terms of gold, own currency, or other convertible currency.

Under one variant of this system, transferees would accept reserve claims in exchange for their own currency at par. Profit considerations would impel transferors to purchase convertible currencies with the highest market values in relation to par, while considerations of convenience would impel them to purchase the currency most commonly used as a means of market intervention, namely U.S. dollars. The United States, as a special case, might have a balance of payments incentive to purchase the currencies of those countries most liable to convert dollar holdings into gold. Under such a system the circulation of reserve claims would be canalized in a somewhat arbitrary way. There would be a tendency for claims to flow to countries whose currencies were at a premium—which would not necessarily be those whose balances of payments were currently most favorable. There would be a second tendency for claims to flow to the United States and possibly back from the United States to the countries that were currently converting dollars into gold.

If the countries whose currencies were at a premium were anxious to avoid an accumulation of holdings of reserve claims at the expense of other types of reserves, they would have an incentive to reduce the premiums. If they did so, the effective range of currency variations within the permitted margins would tend to decline—a result which is probably far from desirable from the standpoint of the adjustment process. Another arrangement of transferability which, though less strongly biased, might be equally arbitrary in its effects would be one in which countries were both free to transfer reserve claims and obliged to accept transfer at par against U.S. dollars. Under this arrangement the transferor would have no particular profit incentive to direct claims toward any one country rather than any other. The convenience in transferring to the United States, though somewhat lessened by the fact that all transferees would provide dollars in exchange for claims, would remain and, since it would not be offset by profit considerations, would probably assume decisive importance. Claims would therefore tend to flow from all countries to the United States, which in turn would tend to transfer or retransfer claims to countries showing a propensity to convert dollars into gold. This system would have the merit of not interfering with the exchange policies of countries within the permitted margins but, like the previous system, would impose upon the United States the responsibility for determining the circulation of the claims. To avoid the appearance of giving a special role to the United States, the transferee might be required to purchase claims in exchange for his own currency at a rate equivalent, on foreign exchange markets, to parity in terms of dollars, and to make this equivalence good by offering conversion facilities into dollars. Yet this requirement would not alter anything of substance in the system.

Moral Restraints on Transfer

Owing to the element of arbitrariness inherent in any system that combines free transferability of international reserve claims with an unlimited obligation to accept them, there is a danger that under such a system (1) reserve claims might be maldistributed relative to other forms of reserves, (2) countries might be asked to accept reserve claims in exchange for reserves of types usable for market intervention at times when, owing to balance of payments difficulty, they were tending to run short of those types of reserves, and (3) reserve claims might be transferred back and forth between countries with a velocity of circulation unflattering to their prestige.

The most important step toward securing a rational distribution of units through transfer would be the acceptance of the principle that countries would not seek to transfer units unless they had a balance of payments justification for doing so and were simultaneously utilizing at least some of their holdings of other reserves. There might even be an understanding as to the proportion of the decline in their reserves that countries would finance by reducing their holdings of units. This does not mean that transfers need be subject to prior approval in the light of this criterion. It would suffice that, as for gold tranche drawings in the Fund, transferors should make a declaration of balance of payments need on the occasion of each transfer, or even that they should give a general undertaking of their intention to use the facility in the manner described above, with some provision for ex post review, if necessary. The main point is that transferors, while remaining as unhampered as possible in the immediate use of reserve claims, should not feel free to “improve” the composition of their reserves by unloading the claims on other participants.

Creditor Limits

Although an undertaking as to the use of the facility just described would prevent abuse of the facility, it would not protect transferees against having to accumulate an inequitably high proportion of reserve claims in their reserves or to accept such claims at inconvenient times. Indeed, for certain countries the first of these difficulties would be intensified by the principle of use just enunciated. These are the countries that might find themselves, for quite arbitrary reasons, accumulating an unduly high proportion of reserve claims which they did not feel free to retransfer because their reserves as a whole were rising and their balance of payments position remained good.

One way suggested for meeting this difficulty is to set up quantitative limits on the reserve claims that countries would be obliged to accumulate as a result of the acceptance obligation. Since that obligation is in some sense a quid pro quo for the initial allocation of reserve claims to the different participating countries, it is usually suggested that creditor limits should be proportionate to the initial allocations in question. Clearly, if countries are to have reasonable assurance of being able to transfer their claims without an undue amount of negotiation, the sum of the holding limits must exceed substantially the amount of claims in existence. Thus, the limit usually assumed for each country would be two or three times its cumulative allocation of reserve claims. Presumably countries would be free to accept transfer beyond their limits but would also be free to retransfer to other countries, until their holdings were down to the limits, without claiming or implying that they have any balance of payments need to do so. The plan might even go further and deny countries the right to refuse to accept transfer, leaving as the sole significance of the limits the freedom of any country attaining its limit to retransfer without any implication that it has a balance of payments need. Not much can be said, however, for having transfers that are immediately reversed; nor is it desirable to encourage countries to accept far beyond their limits, then suddenly to unload the excess on other countries, perhaps when their attitude toward reserve claims changes.

A theoretical possibility that would avoid giving a special position to any particular currency would be to make reserve claims transferable at par against gold. The great majority of countries, however, are unwilling to accept the convertibility of their own currencies directly into gold, and so would be most unlikely to agree to convert into gold any reserve claims which other countries might choose to transfer to them. Even if they were willing to do this, the ease of obtaining gold by such transfers and the need to hold gold in order to meet such transfers might cause an undue demand for gold at the expense of reserve currency countries.

Notwithstanding holding limits such as those just discussed, countries whose reserves were low in relation to the amount of claims allocated to them might run short of reserves in other forms before their holdings of claims had reached the prescribed multiple. This danger would be especially great if a large part of world reserves came to consist of reserve claims. It might be felt, therefore, that a country’s obligation to accept transfer of reserve claims should cease when its holdings of reserves other than reserve claims fell to a given proportion of its total reserves, say, to one half the proportion prevailing in the average participating country.

Guided Transferability

Even these two kinds of limits, however, might not satisfy potential transferees. They might want protection against having to accept reserve claims at times of payments difficulty, when acceptance, though followed by immediate retransfer, might be unwelcome, or against having to hold an inequitably high—or inequitably low—proportion of their reserves in the form of such claims. In this event, the only recourse would be to a form of transferability under some degree of collective guidance.

Such guidance might be either voluntary or compulsory. If compulsory, it might take the form either of rules which, though varied from time to time, left the transferor with considerable choice among potential transferees, or of more precise indications as to the direction of transfer. The provision of such guidance on a voluntary basis would seem to be a useful feature of any transferability scheme. Many transferors might be glad to avail themselves of such a facility, even if not obliged to do so, in order to escape the onus of deciding which other country was to accept more reserve claims at the expense of its reserves in other forms.

The general principles underlying such guidance would presumably be similar to those gradually elaborated in response to experience, with general approbation, in the Fund’s policies on currencies to be drawn. Thus, countries would be encouraged to make any transfers to countries, other than those in balance of payments difficulties, whose holdings of reserve claims constituted a relatively low proportion of their total reserves, subject, however, to the above-mentioned limits on acceptance of transfer.

There is, of course, a certain tension in the system of guided transferability as described above between the existence of holding limits based on countries’ relative degree of participation in the scheme and the principle of tending toward proportionality of reserve claims to other reserves. (An analogous tension is found also in the Fund’s policies on currencies to be drawn, as between the reserves principle and the quota principle of distributing reserve positions in the Fund.) This tension is difficult to resolve. If transfers were guided so as to bring holdings of reserve claims by countries not in payments difficulty approximately into proportion with holding obligations, a country’s actual holdings of such claims would not vary with its reserves until the country itself decided to transfer claims. On the other hand, if transfers were guided so as to effect a rough proportionality of reserve claims to other reserves, countries that had limited their participation in the scheme—and received relatively small allocations of reserve claims—would be denied the right to a corresponding limitation of their holding obligations.

A possible solution would be to dispense with fixed limits altogether, but to provide that transfers be guided so as to tend toward a distribution of reserve claims among countries not in balance of payments difficulty, based on some formula that takes account both of relative total reserves and relative degrees of participation in the scheme.

Holding Ratios

Another approach to this whole problem dispenses both with creditor limits and with collective guidance of transfers and relies instead on some fixed proportionality between reserve claims and other types of reserves.

In one arrangement of this type, reserve claims and other forms of reserves would be exchanged between countries on fixed settlement dates in such a way as to restore a uniform proportion of such claims to the other types of reserves in question. Four variants of this arrangement are conceivable: claims may be held in a uniform proportion either to gold reserves or to total reserves and claims may or may not be transferable between settlement days. Proportionality to total reserves has the advantage that reserve claims would be transferred only from deficit countries and to surplus countries. Proportionality to gold alone would have the same result so far as countries’ gold reserves and foreign exchange reserves moved up or down together. On the other hand, the linking together of gold holdings and holdings of reserve claims might somewhat affect the choice between holding gold and foreign exchange reserves. Transferability of units between settlement dates would encourage a somewhat greater use of both reserve claims and gold than would otherwise occur.

Any system of transferability based on uniform holding ratios has the disadvantage, particularly in the early days of the scheme, that only a small proportion of any deficit could be financed by the transfer of reserve claims. For example, if the total amount of claims in existence were only 5 per cent of the total amount of gold, 95 per cent of any deficit financed by transfer of gold-cum-units would in effect be financed by transfer of gold.

One variant of the proportionality rule offers more scope for choice in the composition of reserves. According to this plan, a country would be free to transfer units only if the proportion of claims to gold in its reserves—or of claims to gold and foreign exchange—was higher than in the average country. Similarly, it would be obliged to accept transfer only if these proportions were lower than in the average country. A balance of payments deficit would tend to put countries in the former position, and a surplus to put them in the latter position. A country in balance of payments difficulty, however, might still have to accept claims in transfer, thus intensifying the decline in its other reserves, if, at the outset of its payments difficulty, it happened to have a relatively low proportion of claims in its reserves.

Transfer Ratios

It is sometimes suggested that instead of linking the holding of reserve claims to the holding of gold, the transfer of these claims should be linked to the transfer of gold—or of gold and foreign exchange—in some fixed proportion. This proportion could diverge substantially from that of the average ratio of claims to gold—or of claims to gold and foreign exchange—in reserves. For example, reserve claims might move in a 50:50 ratio with gold. This system would permit a greater use of claims from the very beginning of the scheme than would a holding ratio system, though less than would a system under which claims were transferred by themselves.

The principal merit of the transfer ratio is that even if the transfer of claims-cum-gold, or claims-cum-other reserves, was as ill directed or arbitrary—for the reasons discussed above (pp. 444-45)—as the transfer of reserve claims alone would be, the danger of transferees having to accept claims while their other reserves were falling would be reduced. For this reason, and because a 50:50 package would probably be more willingly accepted than reserve claims alone, less need might be felt for creditor limits or for guidance of transfers. Since, however, this danger would be merely reduced and not eliminated, it is not clear that these safeguards could in fact be entirely dispensed with.

There are, however, considerable technical difficulties in transfer ratio systems. Assuming that the obligation to receive transfer is at par—whether against transferee currency or dollars—the incentive to transfer reserve claims and the willingness to receive them will vary according to the market value of the other elements in the package—gold or foreign exchange or both as the case may be. If the transferor can transfer either gold or foreign exchange along with reserve claims, the composition of the package will also vary with market prices. This effect could be avoided only by allowing the transferee to vary the price at which he accepts transfer of the reserve claims according to the market value of the other elements in the package.

Special problems arise where reserve units need be accepted only when accompanied by gold. As the value of transferable reserve claims grows, countries normally holding little gold in their reserves might tend to convert foreign exchange into gold in order to get the wherewithal to utilize their claims. Also, if the United States exercises its right to transfer reserve claims-cum-gold, it may appear to be offering less than full gold convertibility for the U.S. dollar.

It is sometimes argued in favor of the transfer ratio that it will partly offset the decline in balance of payments discipline that would otherwise result from the creation of reserve claims. It may indeed have some effect of this sort, at least in the initial stages, when the claims have still to win acceptance as “hard” reserves. However, since the main purpose of creating additional reserves is to increase the sense of balance of payments ease in the world, it is difficult to see the purpose of this offset. If the balance of payments constraint on policy is generally too weak rather than too strong, there seems little point in creating the reserves at all. In any event, reluctance to part with reserve claims can always be enhanced, if desired, by raising the rate of interest paid on them.

None of the systems based on proportionality to reserves, whether in the form of holding ratios or transfer ratios, makes allowance for the possibility that countries may wish to limit their participation in the reserve creation scheme and, therefore, to limit their obligation to hold reserve claims, compared with their share in the reserves (or the gold reserves) of all participants, even if this means limiting their participation in the initial distribution of new reserves.

Concluding Remarks

From what has been said, it will be clear that use and acceptance of reserve claims are intimately connected. Absolute freedom of use, i.e., of transfer, in the hands of the transferor risks making the acceptance obligations of the transferees excessively burdensome. Complete protection of the transferees, through narrow creditor limits or rigid proportionality arrangements, risks impairing the usefulness of the reserve claims to the transferor. A system of guided transferability holds the balance more evenly between transferor and transferee.

Résumé

Cette étude examine les problèmes qui se poseraient vraisemblablement à propos de l’utilisation et de l’acceptation de tout instrument de réserve qui pourrait être délibéremént créé sous forme de créances sur un organisme international ou sur un agent international représentant un groupe de pays. Elle met en évidence les difficultés qui se présenteront, si les nouvelles créances de réserve sont librement transmissibles, dans le cas où leur acceptation contre de l’or et des monnaies serait entièrement facultative à des taux librement établis et dans le cas oé elle serait obligatoire sans limitation de montant à des taux fixes. L’étude examine ensuite les conséquences éventuelles d’une discipline consentie en matière de transferts et montre qu’il serait nécessaire d’apporter certaines limitations à l’obligation d’accepter les créeances de réserve transmises par d’autres pays membres. Elle laisse entendre que, même avec ces deux catégories de restrictions, il faudrait probablement soumettre la circulation des instruments à certaines directives arrêtées en commun. Les problèmes que poserait cette orientation collective de la transférabilité sont brièvement évoques.

L’analyse etudie également une autre solution possible du probèeme qui ferait intervenir une certaine proportionnalité fixe entre les créances de réserve et les autres catégories d’instruments, sous forme soit de rapport de detention, soit de rapport de transfert. Elle conclut qu’un système de transférabilité orientée permettrait de mieux concilier les intérêts des cédants et des cessionnaires.

Resumen

Este trabajo expone los problemas que probablemente surgirían con motivo del uso y aceptación de cualquier activo de reserva que pudiera crearse deliberadamente en forma de crédito contra una institución internacional o un agente que actúe por un grupo de paisés. Pone de manifiesto las dificultades que surgirían si, existiendo entera libertad para transferir los nuevos activos de reserva, su aceptación contra oro y divisas fuera bien puramente voluntaria y segên tipos de cambio libremente determinados, o bien obligatorio en cantidades no determinadas y a tipos de cambio fijos. Luego examina los efectos que produciría el coartar la libertad de transferencia y señala la necesidad de fijar ciertos límites a la obligatión de aceptar transferencias de activos de reserva ofrecidos por otros países miembros. Sugiere que a pesar de estas dos clases de limitaciones, quizá se necesite también cierto grado de orientatión colectiva en lo que respecta a encauzar la transferencia, y discute sucintamente los problemas que ello originaría.

Este artículo examina además otra manera de abordar el problema, según la cual las tenencias—o, alternativamente, las transferencias—de activos de reserva deberían guardar una proportión fija con las tenencias o transferencias, respectivamente, de las otras clases de reservas. La conclusión a que Uega es que el sistema de transferencias orientadas es el que mayores probabilidades ofrece de mantener más o menos a un mismo nivel las ventajas para los transferentes y para los cesionarios.