In the period following World War II international reserves have been created by the balance of payments deficits of the United States, the inflow of gold into official reserves, members’ transactions with the International Monetary Fund, and, more recently, the allocation of special drawing rights (SDRs). This paper analyzes the extent to which transactions with the Fund’s General Account have contributed to the growth of international reserves during the period 1951–73, using the framework described by J. Marcus Fleming in 1964.1
The paper first examines the direct impact on world liquidity of members’ transactions with the Fund. It then deals with the effects of the introduction of the SDR facility on gross and net reserve creation in the Fund’s General Account. Next, it analyzes the effects on liquidity of the conversion of currencies purchased from the Fund, as well as of foreign exchange transactions undertaken by members in order to make repurchases with the Fund. Furthermore, an attempt is made to measure the effects of purchases from the Fund by member countries for the purpose of acquiring balances of their own currency from other member countries. Finally, the effects on liquidity of transactions between participants in the Special Drawing Account are briefly investigated.
APPENDIX Effects on World Liquidity of the Use of Special Drawing Rights in Fund Transactions Between Members
The use of SDRs in transactions between participants in the Special Drawing Account may have an expansionary, contractionary, or neutral impact on world liquidity, just as do members’ transactions with the General Account.
Mr. Barattieri was Technical Assistant to the Executive Director for Italy in the Fund at the time this article was written. He is now on the staff of the Bank of Italy.
Mr. Batzella, who was an Operations Officer in the Financial Relations Division of the Treasurer’s Department of the Fund when this article was written, has since joined the International Bank for Reconstruction and Development. He is a graduate of the Universita Commerciale Luigi Bocconi, Milan.
J. Marcus Fleming, “The Fund and International Liquidity,” Staff Papers, Vol. 11 (July 1964), pp. 177-215; see also Fleming’s “Effects of Various Types of Fund Reserve Creation on Fund Liquidity,” Staff Papers, Vol. 12 (July 1965), pp. 163-88. Hannan Ezekiel, when studying the problem of Fund-generated liquidity, confined his analysis to the direct effects of members’ transactions with the Fund—”The Present System of Reserve Creation in the Fund,” Staff Papers, Vol. 13 (November 1966), pp. 398-420, and “Reserve Creation in the Fund Under the Present System, 1951–1967” (unpublished, International Monetary Fund, November 14, 1968).
A so-called super gold tranche may thereby be created.
The right of members to draw on Fund resources up to their gold tranche position has formally become fully automatic with the amendment of the Fund’s Articles of Agreement in 1969. The amended Article V, Section 3 (d), states that “proposed gold tranche purchases shall not be subject to challenge.” Furthermore, the amended Article VI, Section 2, states: “A member shall be entitled to make gold tranche purchases to meet capital transfers.” Prior to this amendment of the Articles, gold tranche positions in the Fund were legally considered conditional liquidity, although in practice members could fully rely on the availability of such funds, particularly after Executive Board Decision No. 1745-(64/46), August 3, 1964, Selected Decisions of the Executive Directors and Selected Documents, Third Issue (Washington, January 1965), p. 49. Even prior to this decision, however, the virtual unconditionality of gold tranches was affirmed by Executive Board Decision No. 102-(52/11), February 13, 1952, Selected Decisions of the International Monetary Fund and Selected Documents, Sixth Issue (Washington, September 30, 1972), pp. 22-25. (Hereinafter referred to as Selected Decisions.) On these grounds, members’ gold tranches have been considered to represent unconditional reserve assets for the whole period under consideration in this paper.
Such loans do not change the Fund’s holdings of these particular currencies, since in general they are immediately purchased by another member.
In the next section it will be argued that SDR holdings in the General Account should be treated in the same manner as gold holdings.
Since member countries that have not fully paid up the total currency subscription of their quota cannot use the Fund’s resources, the following equations do not apply to them.
The method used here is derived from that used by Fleming in “The Fund and International Liquidity” (cited in footnote 1), p. 187, who argues that “the Fund’s net contribution to unconditional liquidity up to any point of time can be measured by the amount of members’ gold tranche positions less the amount of gold held by the Fund.” This approach is simpler and more systematic than Ezekiel’s in “The Present System of Reserve Creation in the Fund” (cited in footnote 1); he determined the reserve position in the Fund by adding algebraically a number of heterogeneous assets and liabilities of the Fund.
Besides bar gold holdings, the Fund’s gold account also comprised “gold deposits” and “investments” until February 1972. The former were made in a number of countries at the time of the quota increase of 1965 to mitigate the losses of gold caused by other countries’ purchases to pay subscriptions for increases in quotas; the latter represented sales of gold by the Fund to the United States, the proceeds of which were invested in U. S. Government securities to increase the Fund’s current income. Since gold deposits and investments appear in both the members’ and the Fund’s gold accounts, they should not be subtracted from reserve positions in calculating the Fund’s net creation of reserves for the period covered in this paper.
This formula also reflects the effects of increases in Fund quotas. When a quota increase takes place, the required gold payment to the Fund is not offset by the increase in reserve position to the extent that the member is in credit tranche positions. As a result, net reserve creation in the General Account will show a decline of created liquidity, but this is matched by an increase of conditional liquidity.
Executive Board Decision No. 1477-(63/8), February 27, 1963, as amended by Decision No. 2192-(66/81), September 20, 1966, Selected Decisions, pp. 42–47.
See Hannan Ezekiel, “The Effects of Compensatory Financing Transactions on Reserve Positions in the Fund” (unpublished, International Monetary Fund, May 22, 1967).
Executive Board Decision No. 2772-(69/47), June 25, 1969, Selected Decisions, pp. 47-48.
It should be noted that under Article XXV, Section 7(d), the Fund may also require a participant to provide its currency for SDRs held in the General Account.
With the exception of repurchases made in accordance with Article V, Section 7(b).
In September 1971 the Executive Board also decided that members could draw SDRs from the General Account to be used immediately in a transaction with designation, but no member has yet done so, except for purposes of reconstitution. In July 1972 the United Kingdom purchased SDR 292 million from the General Account in accordance with Article XXV, Section 7(f), which permits the Fund to use SDRs in transactions by agreement with the participant.
The payment of remuneration in gold is limited by Rule 1-9, International Monetary Fund, By-Laws, Rules and Regulations, Thirty-First Issue (Washington, April 30, 1973), p. 39, to the extent that the Fund’s receipts of gold, during the year, in payment of charges, exceed payments during that year of gold as transfer charges and interest on borrowings.
For example, the total remuneration paid for the fiscal year ended April 30, 1972 was SDR 30.5 million, including SDR 28.5 million in gold, 2.0 million in SDRs, and only SDR 5,000 in members’ currencies; however, in the following fiscal year, of the total remuneration paid (SDR 29.3 million), more than SDR 5.3 million was in members’ currencies.
According to Article V, Section 8(f), charges may be paid in the member’s own currency when the member’s monetary reserves are less than one half of quota. However, when the Articles of Agreement were amended in 1969, the Fund’s concept of monetary reserves was changed from net to gross; therefore, it has become comparatively rare for members to be entitled to pay charges in their own currency.
Annual administrative costs of the Special Drawing Account have been close to SDR 1 million. The assessment is levied as a flat percentage of each member’s allocation of SDRs.
See Executive Board Decision No. 1371-(62/36), July 20, 1962, Selected Decisions, p. 36, approving the statement entitled, “Currencies to be Drawn and to be Used in Repurchases,” contained in SM/62/62, Revision 2, which is incorporated into the Fund’s Annual Report for 1962.
It is, however, possible that the currency obtained from the Fund is converted at the central bank that issues the currency required by the drawing member, rather than at the drawee’s central bank. For instance, a member of the sterling area, say Ghana, might obtain U. S. dollars from the Fund, then request the Bank of England to convert them into pounds sterling. The effects of such a conversion are opposite to those described in the text, determining a creation of liquidity rather than a destruction. In the example here, the United States would register an increase in its reserve position in the Fund, the United Kingdom would gain foreign exchange (dollars) through the conversion, and the final recipient of Ghana’s payment (for example, Nigeria) would gain sterling. International liquidity would thereby increase by three times the amount drawn from the Fund. This is a rather improbable case, since conversions generally take place at the drawee’s central bank.
Fleming also briefly examined the possible effects of conversions in “The Fund and International Liquidity” (cited in footnote 1), pp. 183-84.
This does not apply to repurchases falling due under Article V, Section 7(b), which are payable with the assets held in the repurchasing member’s monetary reserves, whenever such assets can be accepted by the Fund.
Executive Board Decision No. 1371-(62/36) as cited in footnote 20. Repurchases can also be made in gold or SDRs, but the Fund’s holdings of gold and SDRs are already deducted from the computation in equation (6) of net reserve creation through Fund transactions.
The member whose currency is used is necessarily in a gold tranche position, since only those currencies of which the Fund’s holdings are less than 75 per cent of the issuing member’s quota can be used in repurchases (Article V, Section 7(c) (iii)).
If SDRs are used in repurchases, no conversions are necessary; thus SDRs can be assimilated to gold or reserve currencies.
From 1962 to 1971 there were very few purchases and repurchases in pounds sterling, except in 1967; from 1964 to 1968 there were also scarcely any repurchases in U. S. dollars. However, the improvement of international economic and financial integration has led to expanded holdings of a number of national currencies as international reserves, with the result that drawings and repurchases may have required fewer conversions.
Fleming, “The Fund and International Liquidity” (cited in footnote 1), p. 184.
For example, if the United States draws SDR 100 in lire which are used to acquire SDR 100 in dollars from the Bank of Italy, there is a destruction of world liquidity equal to Italy’s loss of foreign exchange, which is not accounted for in equation (7).
Several large repayments to the Federal Reserve’s swap network match surprisingly well both in timing and in amount some of the largest drawings from the Fund by the major industrial countries. The data in column G of Table 5 represent such drawings.
Through this process not only is the amount drawn from the Fund but also the balance of the purchasing member’s currency immediately canceled from international reserves. However, as the decrease in balance is outside the scope of this paper, only the amount drawn for this purpose must be subtracted.
The 1970 quota increase also contributed to the fall in net reserve creation (see footnote 9). Similarly, sales of South African gold to the Fund have tended to reduce net reserve creation, since the increase in RPF was lower than the increase in Fund holdings of gold (for example, drawings of sterling when the United Kingdom was in the credit tranche position); as for South Africa, such sales only involve a change in the composition of reserves. However, gold sales of SDR 548 million and SDR 16 million to the United States and Austria, respectively, in mitigation of the effects of the quota increase, did not affect net reserve creation, since they matched the reduction of the RPF of both the United States and Austria. An additional SDR 7 million of gold was sold to Germany in December 1971.
There are two types of currencies “convertible in fact”: (1) U.S. dollars, French francs, and pounds sterling, which must be converted by the issuer on demand into any of the other two, under Article XXXII, Section (b)(1); and (2) Belgian francs, Netherlands guilders, deutsche mark, Italian lire, and Mexican pesos, which are convertible only into U. S. dollars, under Article XXXII, Section (b)(2).