136. Current Economic Developments1
DIFFERENCES REMAIN ON MONETARY REFORM AFTER GROUP OF TEN MEETING
The Group of Ten Ministers made progress toward agreement on the creation of a new type of international monetary reserve but did not reach complete agreement, Secretary Fowler said after the meeting of the Ministers in London July 17–18.2 He thought that the differences that remain on major points can be resolved so that a comprehensive outline of a contingency plan for supplementary reserve creation can be presented at the annual IMF meeting in Rio in September.
The Deputies to the Ministries are now meeting in an attempt to narrow the remaining differences. They are to report to the Ministers by mid-August on the status of their negotiations. If necessary, the Ministers will meet again on August 26.
[Page 395]Background
At US initiative serious negotiations to create reserves began in September 1965 in the Group of Ten and Executive Board of the IMF. The Group of Ten Ministers reached agreement on many essential points in July 1966.3 Again at US initiative it was decided at the IMF annual meeting in September 1966 to broaden the negotiations to include representatives of all IMF members. As a result of this decision, the Group of Ten Deputies and the IMF Executive Directors have had series of joint meetings to reach agreement on a plan. At the fourth and last Joint Meeting in June 1967 the basic elements of a plan were set down but a number of major issues were left open for decision.
Plan Needed for Reserve Creation
A plan is needed for the creation, on a regular basis, of adequate amounts of a new reserve asset in order to supplement existing international reserves—gold and reserve currencies. Expansion of world trade and investment will be progressively hampered by restrictions unless the world’s supply of reserve assets also grows. If one country’s reserve gain must always be another country’s loss there will be a cumulative use of measures to prevent losses of reserves through restrictions. Moreover, the shortage of reserves tends to raise the world level of interest rates through competitive monetary restraint and to stimulate gold and exchange speculation.
Over the long run, all countries need to see their reserves increase; none wishes to see them decline. However, gold entering into monetary stocks is insufficient and dollar reserves cannot expand as they have in the past. Reserve growth continued in 1965–66, although at a relatively slow pace, primarily because of the effects of temporary factors—largely based on credit arrangements which are reversible. This is not satisfactory for the long run as is increasingly recognized. That there is not enough gold to satisfy everyone’s demands is very clear. Furthermore, the US reserve position is such that the flexibility with which dollar reserves has expanded in past is now limited. The global pressure for reserve growth has not been apparent in Europe because until recently the US has supplied reserves that have enabled European reserves to grow at a rate roughly equivalent to 2/3 the rate of growth in European trade. However, in this process the US has suffered deterioration in its own reserve position. For the future this is a global problem, not a US problem.
The need for created reserves may be felt sooner than had been earlier realized. Signs are accumulating that even European countries, though relatively well supplied with reserves, are reluctant to permit [Page 396] their reserves to decline for any length of time and take steps to avoid any redistribution of their reserves. Moreover, growth of business activity and international trade appears to be a slowing down in many countries.
Reserve creation is needed to assure adequate long-run growth in global reserves. It is not designed to meet emergency situations, nor a kind of development assistance facility nor a scheme to help meet balance of payments problems of individual countries. Reserve creation will create a climate favorable to economic growth. By assuring adequate supply of global reserves, capital exporting countries will not face so much pressure to restrict aid or limit private capital outflow in order to increase their reserves from a very limited world supply.
In order to accomplish these objectives, it is necessary to have a money-like asset that will be regarded by monetary authorities as a supplement to gold and dollars and will be treated by them as reserves. Credit facilities which carry specific repayment obligations will not be so readily considered as reserves and will not meet the countries’ desires to increase reserves. Nor will increased credit facilities be as effective in convincing the gold markets that dependence on gold to increase free world reserves has been broken.
Reserve creation is not an answer to the US balance of payments problem, and the fact that we still have this problem is not the reason we are pressing for a good plan by September. Reserve creation will best serve the US by providing a means whereby our reserve assets—now largely gold—can increase. Even if we were in a surplus position now, there is no assurance that our gold position would show much improvement, in view of global shortage of gold, large dollar reserves held by other countries, and the various facilities available for financing payments deficits. The addition of new assets to our reserves, therefore, would augment our gold stock—useful to the dollar both in times of US surplus as well as deficit.
Basic Elements of Reserve Creation
The new asset, which will take the form of drawing rights, would normally be created in a specific annual amount for a 5-year period, say $1 to $2 billion a year. It would be distributed to members in proportion to their IMF quotas and be held by and transferred only among monetary authorities. The asset would be gold value guaranteed and would be backed by members’ obligations to accept the asset and to pay convertible currencies in return. This is a basic obligation which gives asset its value. This is the beginning of an international legal tender.
Countries needing to use new drawing rights—usually deficit countries—would be able to present them to other countries—usually surplus countries—to obtain from them the means used to support their currencies in the foreign exchange market—usually dollars or sterling. [Page 397] This is how countries use gold. No conditions would be imposed on a country’s economic policies as a prerequisite to use.
Because the asset is new and untried, it cannot at outset be unqualified legal tender. Three basic qualifications are under consideration:
- a.
- In order to avoid the possibility of over-concentration of the asset in one country, a member need only accept, in addition to its cumulative distributions of the new asset, an amount equal to two times its distributions.
- b.
- If there are no willing takers of the new asset, members can take advantage of rules requiring acceptance assuring, through guidance by Fund, an equitable distribution of the new asset among the countries in best position to take and hold it—usually surplus countries.
- c.
- In the view of some countries, large and persistent users of the new asset may be asked to restore their holdings of the new asset. The US wishes to have this apply only in exceptional cases when overall liquidity of the scheme is threatened.
The successful operation of reserve creation depends upon a high degree of economic cooperation and understanding. It depends upon countries realizing that it is in their self interest to carry out their obligations to accept and hold the new asset. Careful attention must nevertheless be given in the agreement to problems which might arise in event a country fails to meet its obligations and to the details of provisions on withdrawal and liquidation. A basic agreed principle is that losses that might result in case of default will be borne by members in proportion to their share of distributions rather than in proportion to their holdings. This provision helps assure the security of the asset and an equitable share of any losses in the unlikely event of countries defaulting on fulfillment of their obligations.
Unresolved Issues
Agreement has not been reached on a number of issues of crucial importance to creation of an asset that would be meaningful international money. The most important areas of disagreement concern the formula for taking decisions to create the new asset and whether there should be a specific obligation to reconstitute any use of new asset within specified number of years.
The main division of opinion on almost all open issues is on whether the asset should be money-like or credit-like. After a series of unsuccessful maneuvers to block negotiations to create a new reserve asset, the French have taken the lead in a drive to make the new asset merely an extension of existing credit facilities in Fund and not a reserve asset. Thus, they have advocated that the resources be pooled in the IMF instead of separating them from IMF credit facilities in a special account or a new affiliate. They insist that stringent and specific provisions be imposed requiring repayment of use of the new asset within a few [Page 398] years—a characteristic of credit facilities. In another analogy to credit facilities, they wish to limit the amount of the new asset which a country must accept to an amount equal to its allocation instead of twice the allocations, and they would impose a specific precondition which would prevent activation of reserve creation until the United States no longer is in balance of payment deficit. If each of these issues were resolved as the French propose, the new asset might not be considered as a reserve asset, and to large extent we would have failed in our objective to create a supplement to gold and dollars and to convince the world banking, investing, and trading community that adequate reserve growth is assured.
On the question of decision-making, it is not so much French intransigence as a desire by European Community as a whole to have a larger say in the new reserve creation scheme than would be warranted by its present position in the IMF. The US with 20% of the IMF votes now has a veto over certain important decisions of Fund, such as to increase quotas. The European Community with 16% of the votes does not now have this power; but Six wish a veto over operations of the new reserve creation plan in view of their financial importance. They do not wish, however, to buy veto power by putting up additional resources in the IMF, but instead they want to raise the required majority for certain important decisions from the 80% now applicable in the Fund to 85% in the new plan.
As a practical matter, refusal of the European Community to participate in a reserve creation decision, in present circumstances, would mean that reserve creation would not be workable. On the other hand, it seems reasonable that if a country or a group of countries wants veto power the countries should be prepared to pay for it by increasing the quotas in IMF.
To give the plan specific meaning to the public and to Parliaments, we have proposed that agreement be reached at this time on the amount of reserve creation for the first 5-year period, set as a range up to $2 billion a year. The specific amount and when this period would begin would be decided at a later time. In this way, the public and Congress can know the extent of the US commitment. There is as yet no agreement on this provision.
A related issue which gives us serious concern is the desire of the European Community to amend the IMF Articles in such a way as to achieve a more dominant role in the regular operations of the IMF, through revisions of its procedures and particularly the voting procedures. An effort is being made by the European Community (EC) to tie any agreement on reserve creation to these changes in Fund, a procedure which could further delay or perhaps prevent agreement on reserve creation. Moreover, these changes are opposed not only by United States but by all other members of the Fund outside the European Community [Page 399] because they could effectively hamstring successful operations of the Fund as now conducted.
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- Source: Washington National Records Center, RG 59, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Limited Official Use. The source text comprises pages 1–4 of the issue.↩
- For the communique issued at the conclusion of this meeting, see Document 134.↩
- See footnote 4, Document 129.↩