Group Title: treatment of international reserves by underdeveloped countries as related to the creation of a new form of international reserves
Title: The treatment of international reserves by underdeveloped countries as related to the creation of a new form of international reserves
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Title: The treatment of international reserves by underdeveloped countries as related to the creation of a new form of international reserves
Alternate Title: International reserves
Physical Description: ix, 210 leaves. : illus. ; 28 cm.
Language: English
Creator: Granade, Hugh Rhame, 1939-
Publication Date: 1968
Copyright Date: 1968
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Subject: Banks and banking, International   ( lcsh )
International finance   ( lcsh )
Monetary policy   ( lcsh )
Economics thesis Ph. D
Dissertations, Academic -- Economics -- UF
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
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Thesis: Thesis -- University of Florida.
Bibliography: Bibliography: leaves 187-210.
Additional Physical Form: Also available on World Wide Web
General Note: Manuscript copy.
General Note: Vita.
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Bibliographic ID: UF00097796
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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Resource Identifier: alephbibnum - 000568575
oclc - 13680440
notis - ACZ5312

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THE TREATMENT OF INTERNATIONAL
RESERVES BY UNDERDEVELOPED
COUNTRIES AS RELATED TO THE CREATION
OF A NEW FORM OF INTERNATIONAL
RESERVES







By

HUGH RHAME GRANADE


A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR OF PHILOSOPHY


UNIVERSITY OF FLORIDA
1968












ACKNOWLEDGMENTS


The author would like to express his sincere

appreciation to Dr. George B. Hurff, chairman of his

supervisory committee, for many valuable suggestions and

guidance during the preparation of this dissertation.

Appreciation is also extended to Dr. C. Arnold Matthews

and Dr. Ralph H. Blodgett for their cooperation and

assistance.

The author is especially grateful to his wife,

Gayle, for her encouragement and untiring patience in

typing the manuscript.












TABLE OF CONTENTS


Page

ACKNOWLEDGMENTS ii

LIST OF TABLES v

LIST OF FIGURES viii

INTRODUCTION 1


Chapter
I. THE EVOLUTION OF THE PRESENT INTERNATIONAL
MONETARY SYSTEM FROM THE PRE WORLD WAR I
INTERNATIONAL COLD STANDARD SYSTEM . . 3

The Pre World War I International Monetary
System and the Evolutionary Process in
the Interwar Period . . . . . 4

The prewar international monetary system
reconstructed as a model . . . . 4
The international monetary disorder
following World War I . . . . 7
Postwar recommendations for a return to
the international gold standard . . 9
The gold exchange standard of the 1920's:
an attempt to economize gold ..... 12
The deterioration of the interwar gold-
exchange standard .. ..... .. 15

The Evolution of the International
Monetary System Since World War II . . 24

Early postwar plans to reconstruct the
international monetary system . . 24
The International Monetary Fund:
institutionalized support of the
international gold-exchange standard . 28
Postwar changes in the international
monetary system not directly
associated with the I.M.F . . . 35

Summary . . . . . . . . . 50






TABLE OF CONTENTS--Continued


II. THE DILEMMA OF THE PRESENT INTERNATIONAL
MONETARY SYSTEM: A POSSIBLE SOLUTION AND
A QUESTION THAT MUST BE DEALT WITH ... 52

The Dilemma . . . . . . . . 52
A Possible Solution . . ....... 59
A Question Which Must be Dealt ith . . 70

Behavior which would lead to a more
efficient international monetary
system . . . . . . . . . 72
Behavior which would lead to a less
efficient international monetary
system . . . . . . . . 78

III. THE PROBABLE BEHAVIOR OF UNDERDEVELOPED
COUNTRIES TOWARD DIRECT ALLOCATIONS OF NEWLY
CREATED INTERNATIONAL RESERVE ASSETS . . 89

Some Opinions . . . . . . . 89
The Inadequacy of Previous Analyses . 92
A Measure of Individual Countries'
Policies Toward International Reserves
Based on the Most Rational Function of
Such Reserves . . . . .. . 96
An Analysis of the Behavior Previously
Exhibited by Developed and Underdeveloped
Countries Toward International Reserves 98

Apergu . . . . . . . . . 98
Techniques and definitions used in the
analysis . . . . . . . . 99
Results of the Analysis . . . . 113

A Supplementary Analysis Based on I.M.F.
Drawings . . . . . . . . 159

Introduction . . . . . . . 159
The nature of drawing rights with the
I.M.F. . . . . . . .. . 160
Continuous drawings .......... 162
Percentages of trenches used . . .. 170
Immediate use of incremental gold tranche
positions resulting from general quota
increases . . . . . . . 175


SUMMARY AND CONCLUSIONS . . . . . . .. 179

BIBLIOGRAPHY . . . . . . . . ... .. .187












LIST OF TABLES


le Page

1. COUNTRIES FOR WHICH QUARTERLY RESERVE DATA IS
AVAILABLE FROM THE 15T QUARTER OF 1952 . 103

2. OTHER COUNTRIES INCLUDED IN THE ANALYSIS AND
THE DATES FOR WHICH THE TIME SERIES OF THEIR
RESERVE HOLDINGS BEGINS . . . . ... 104

3. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES AT THE PEAK PRECEDING THEIR
LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES TO THEIR LARGEST CUMULATIVE LOSS OF
INTERNATIONAL RESERVES WHICH OCCURRED BETWEEN
THE 15T QUARTER OF 1952 AND THE 15T QUARTER
OF 196B . . . . . . . . . 116

4. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES AT THE PEAK PRECEDING THEIR
2ND LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES TO THEIR 2ND LARGEST CUMULATIVE LOSS
OF INTERNATIONAL RESERVES WHICH OCCURRED
BETWEEN THE 1ST QUARTER OF 1952 AND THE
1ST QUARTER OF 1968 . . . . . ... 120

5. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES AT THE PEAK PRECEDING THEIR
3RD LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES TO THEIR 3RD LARGEST CUMULATIVE LOSS
OF INTERNATIONAL RESERVES WHICH OCCURRED
BETWEEN THE 1ST QUARTER OF 1952 AND THE
15T QUARTER OF 1968 .......... . 124

6. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES AT THE PEAK FOLLOWING THEIR
LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES TO THEIR LARGEST CUMULATIVE LOSS OF
INTERNATIONAL RESERVES WHICH OCCURRED BETWEEN
THE 1ST QUARTER OF 1952 AND THE 1ST QUARTER
OF 1968 . . . . . .... . . . 128






LIST OF TABLES--Continued


7. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES AT THE PEAK FOLLOWING THEIR
2ND LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES TO THEIR 2ND LARGEST CUMULATIVE LOSS
OF INTERNATIONAL RESERVES WHICH OCCURRED
BETWEEN THE 1ST QUARTER OF 1952 AND THE
1ST QUARTER OF 1968 . . . . . .. .132

B. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES AT THE PEAK FOLLOWING THEIR
3RD LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES TO THEIR 3RD LARGEST CUMULATIVE LOSS
OF INTERNATIONAL RESERVES WHICH OCCURRED
BETWEEN THE 15T QUARTER OF 1952 AND THE
1ST QUARTER OF 1968 . . . . . . 136

9. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES ON MARCH 31, 1968 TO THEIR
LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES WHICH OCCURRED BETWEEN THE 1ST
QUARTER OF 1952 AND THE 15T QUARTER OF
1968 . . . . . . . ... .. . 140

10. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES ON MARCH 31, 1968 TO THEIR
2ND LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES WHICH OCCURRED BETWEEN THE 1ST
QUARTER OF 1952 AND THE 1ST QUARTER OF
1968 . .... . . . . . . 144

11. FREQUENCY DISTRIBUTION OF COUNTRIES ACCORDING
TO THE RATIO OF THEIR HOLDINGS OF INTER-
NATIONAL RESERVES ON MARCH 31, 1968 TO THEIR
3RD LARGEST CUMULATIVE LOSS OF INTERNATIONAL
RESERVES WHICH OCCURRED BETWEEN THE 1ST
QUARTER OF 1952 AND THE 1ST QUARTER OF
1968 . . . . . . . .... . 148

12. DEVELOPED MARKET ECONOMIC CLASS I COUNTRIES
WHICH HAVE HAD DRAWINGS OUTSTANDING WITH THE
I.M.F. FOR 13 OR MORE CONSECUTIVE QUARTERS
BETWEEN THE 1ST QUARTER OF 1952 AND THE
1ST QUARTER OF 1968 . . . . . ... 166






LIST OF TABLES--Continued


13. OTHER HIGH INCOME ECONOMIC CLASS I COUNTRIES
WHICH HAVE HAD DRAWINGS OUTSTANDING WITH
THE I.m.F. FOR 13 OR MORE CONSECUTIVE
QUARTERS BETWEEN THE 1ST QUARTER OF 1952
AND THE 1ST QUARTER OF 1968 . . . ... 167

14. UNDERDEVELOPED ECONOMIC CLASS II COUNTRIES
WHICH HAVE HAD DRAWINGS OUTSTANDING WITH
THE I.M.F. FOR 13 OR MORE CONSECUTIVE
QUARTERS BETWEEN THE 1ST QUARTER OF 1952
AND THE 1ST QUARTER OF 1968 . . . ... 168

15. PERCENTAGE OF GOLD AND CREDIT TRENCHES DRAWN
BY DEVELOPED MARKET ECONOMIC CLASS I
COUNTRIES, INCLUDING THE UNITED KINGDOM AND
THE UNITED STATES, 1952-1968 . . ... 171

16. PERCENTAGE OF GOLD AND CREDIT TRENCHES DRAWN
BY DEVELOPED MARKET ECONOMIC CLASS I
COUNTRIES, EXCLUDING THE UNITED KINGDOM AND
THE UNITED STATES, 1952-1968 . . . .. .172

17. PERCENTAGE OF GOLD AND CREDIT TRENCHES DRAWN
BY OTHER HIGH INCOME ECONOMIC CLASS I
COUNTRIES, 1952-1968 . . . . . .. 173

18. PERCENTAGE OF GOLD AND CREDIT TRENCHES DRAWN
BY ECONOMIC CLASS II COUNTRIES,
1952-1968 . . . . . . . ... 174

19. THE NUMBER OF COUNTRIES WHICH USED THEIR
INCREMENTAL GOLD TRANCHE POSITIONS RESULTING
FROM THE 1959 GENERAL QUOTA INCREASES WITHIN
ONE QUARTER AND WITHIN ONE YEAR . . .. .176

20. THE NUMBER OF COUNTRIES WHICH USED THEIR
INCREMENTAL GOLD TRANCHE POSITIONS RESULTING
FROM THE 1966 GENERAL QUOTA INCREASES WITHIN
ONE QUARTER AND WITHIN ONE YEAR . . .. .177











LIST OF FIGURES


Figure Page

1. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES AT THE PEAK PRECEDING
THEIR LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES TO THEIR LARGEST CUMU-
LATIVE LOSS OF INTERNATIONAL RESERVES WHICH
OCCURRED BETWEEN THE 1ST QUARTER OF 1952
AND THE 1ST QUARTER OF 1968 . . . . 119

2. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES AT THE PEAK PRECEDING
THEIR 2ND LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES TO THEIR 2ND LARGEST
CUMULATIVE LOSS OF INTERNATIONAL RESERVES
WHICH OCCURRED BETWEEN THE 1ST QUARTER OF
1952 AND THE 1ST QUARTER OF 1968 . . .. .123

3. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES AT THE PEAK PRECEDING
THEIR 3RD LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES TO THEIR 3RD LARGEST
CUMULATIVE LOSS OF INTERNATIONAL RESERVES
WHICH OCCURRED BETWEEN THE 1ST QUARTER OF
1952 AND THE 1ST QUARTER OF 1968 . . .. .127

4. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES AT THE PEAK FOLLOWING
THEIR LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES TO THEIR LARGEST CUMU-
LATIVE LOSS OF INTERNATIONAL RESERVES WHICH
OCCURRED BETWEEN THE 1ST QUARTER OF 1952
AND THE 1ST QUARTER OF 1968 . . . ... 131

5. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES AT THE PEAK FOLLOWING
THEIR 2ND LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES TO THEIR 2ND LARGEST CUMU-
LATIVE LOSS OF INTERNATIONAL RESERVES WHICH
OCCURRED BETWEEN THE 1ST QUARTER OF 1952
AND THE 1ST QUARTER OF 1968 . . . ... 135
vili





LIST OF FIGURES--Continued


6. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES AT THE PEAK FOLLOWING
THEIR 3RD LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES TO THEIR 3RD LARGEST
CUMULATIVE LOSS OF INTERNATIONAL RESERVES
WHICH OCCURRED BETWEEN THE 1ST QUARTER OF
1952 AND THE 1ST QUARTER OF 1968 . . . 139

7. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES ON MARCH 31, 1968 TO
THEIR LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES WHICH OCCURRED BETWEEN THE
1ST QUARTER OF 1952 AND THE 1ST QUARTER OF
1968 . . . . . . . .... .. 143

8. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES ON MARCH 31, 1968 TO
THEIR 2ND LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES WHICH OCCURRED BETWEEN
THE 15T QUARTER OF 1952 AND THE 1ST QUARTER
OF 196B . . . . . . . . ... 147

9. PERCENTAGE FREQUENCY DISTRIBUTION OF COUNTRIES
ACCORDING TO THE RATIO OF THEIR HOLDINGS OF
INTERNATIONAL RESERVES ON MARCH 31, 1968 TO
THEIR 3RD LARGEST CUMULATIVE LOSS OF INTER-
NATIONAL RESERVES WHICH OCCURRED BETWEEN THE
1ST QUARTER OF 1952 AND THE 1ST QUARTER OF
1968 . . . . . . . ... .. . 151











INTRODUCTION


In recent years economists and international

monetary authorities have become increasingly concerned over

the problems associated tvith the present international

monetary system. Most serious students of the system agree

that it has inherent weaknesses which should be eliminated,

and they have extensively debated the question of how such

a result could best be achieved. While complete agreement

has not buen reached, many theoreticians and policy makers

favor the creation of a new type of international reserve

asset. In fsct, the Board of Governors of the International

Monetary Fund (I.M.F.) are now in the process of voting on

a proposed amendment to the I.M.F.'s Articles of Agreement

which provides for the creation of a now form of inter-

nntional reserve asset to be distributed anong its member

countries on a noncontrlbutory basis.

If any new international reserve assets are

purposely crested through the International Monetary Fund

or by other means, ownership of these assets must be obtained


1Cstablishmcnt of a Facility Based on SDecial Draminq
Rinhits_ inthelnt---er5-n--a-atina onetary Fjind and foHdificat[ions
in the Rules and Practices of the Fund, A Report by the
Executie- Directors to the Board of Governors Proposing
Amendment of the Articles of Agreement (Washington:
International onretary Fund, April, 1968).





by individual countries before they can function as inter-

national reserves. This means that a decision as to how

these reserve assets will be allocated among individual

countries till be required. On the one hand, it is argued

that such assets should be directly allocated only to the

developed countries. On the other hand, it is argued that

all countries should be direct recipients of these assets.

The allocation decision could be made on the basis

of political and/or equity considerations. However, most

plans to modify the international monetary system have been

proposed as a means to achieve a more efficient system.

Taking the achievement of a more efficient international

monetary system as a desirable goal, this paper attempts to

indicate whether this goal will be brought closer or removed

further from attainment by the direct allocation of newly

created reserve assets to the underdeveloped countries.











CHAPTER I


THE EVOLUTION OF THE PRESENT INTERNATIONAL MONETARY
SYSTEM FROM THE PRE WORLD WAR I INTERNATIONAL
GOLD STANDARD SYSTEM


The present international monetary system is the

product of an evolutionary process which has been influenced

by innumerable political, social, and economic forces. The

features of the present system are the result of ad hoc

adaptations and independent policy decisions of individual

countries as tell as numerous arrangements, agroaments, nrd

compromises among countries. The ccmposite result of these

many influences is a system which is neither simple nor very

logical.

This chapter examines some of the major events and

forces of this evolutionary process. Its purpose is to

point out: (1) the basic vulnerability of the present inter-

national monetary system to speculative expectations of

changes in exchange rates or the price of gold; (2) how this

source of instability became embedded in the present system;

and (3) some of the measures taken in the post World War II

period to mitigate the effects of this instability. It is

hoped that this emphasis mill clarify the need for future

efforts to reform the international monetary system to be

directed at minimizing this vulnerability as well as







providing additional international reserves at an adequate

rate.


The Pre World War I International Monetary
System and the Evolutionary Process in
the Inter ar Period

Even though the forces involved in the evolutionary

process have been rany, following World War I the dominant

force was the widespread desire among economists and govern-

ments for a "return to normalcy." It was generally

considered that this return to "normal" would include a

return to the international gold standard as it existed

before the war. The efforts which were undertaken as a

result of this desire to restore the international gold

standard are primarily responsible for the establishment of

the basic framework of the present international nonetaiy

system.


fl rearr international monetary_system reconstrucLed as
a model

An international currency system based on an inter-

national gold standard had been established among the leading

countries of the world, as well as many others, some 30 to 35

years preceding the outbreak of World War I. Whil this

system experienced only a short life span, its appeal to

some economists and monetary authorities as a solution to

international payments problems has yet to die. much of this

appeal is undoubtedly due to (1) the fact that the prc World

War I international monetary system did perform well and

(2) the logical consistency of the models constructed to







describe how international adjustment took place within the

framework of the international gold standard.

Arthur I. Bloomfield describes the performance of

the prewar international monetary system as follows:

During this period, extending from about 1880
to 1914, the exchange rates of the various gold
standard countries moved within narrow limits
approximating their respective gold points
without the support of exchange restrictions,
import quotas or related controls, which imre
virtually unknown even for currencies on paper
or silver standard. Only a trifling number of
countries were forced off the gold standard,
once adopted, and devaluations of gold currencies
were highly exceptional. Yet all this was
achievaJ in spite of a volume of international
reserves that, for many of the countries at
least, was amazingly small and in spite of only
a minimum of international cooperation, or of
international agreements or commitments, on
monetary matters. This remarkable ptcrforrmanca,
essentially the product of an unusually
favorable combination of historical circumstances,
appears all the more striking when contrasted
with the turbulence of post-1914 international
experience and remains, even today, a source of
some measure of fascination and indeed of
puzzlement to students of monetary affairs.1


Arthur I. Bloomfield, monetary Policy Under the
International Gold Standard: 1880--1-91-4 cN York: Federal
Reserve Bank, 19597, p. 9. Also see R. C. Haitrey, The
Gold Standard in Theory and Practicr (3d ed.; London:
Longmans, Green & Co., 1933; Dennis H. Robertson, "Ho' Do
We Want Gold to Behave?" The International Gold Problem, A
Record of the Discussions of a Study Croup 6fy mn'bers -of the
Royal Institute of International Affairs 1929-1931 (London:
Oxford University Press, 1932), pp. 18-46; William Adams
Brown, Jr., England and the Neu Gold Standard 1919-1926
(New Haven: Yale University Press, 1-929)pp. 3-8; Benjamin
M. Anderson, International Currency: Gold Versus Bancor or
Unitas, An AddresDelivered before the Chamber o Commerce
of the State of New York, February 3, 1944 (New York:
Economists' National Committee on Monetary Policy, 1944);
R. G. Hawtrey, Monstar y Reconstruction (2d ed.; London:
Longmans, Green & Co., 1926$, pp. 37-42; Fritz Machlup,
International Payments Debts, and Gold (New York: Charles
Scrioner-'a Sons, 19574 pp. 293-95; and Paul Einzig,
IYonaetry Reform in Theory and Practice (New York: Macmillan
Co., 19367, pp. 9-19, 25-26.







To explain just how the prowar international gold

standard adjustment mechanism worked has been the subject

of many efforts. Whether or not the international gold

standard ever actually existed in its "textbook" form has

been debated at some length as has the automaticity with

which it was supposed to bring about balancing adjustments
2
between countries engaged in international transactions.

Robert Triffin has presented one of the clearest explanations

of how such an international gold standard mechanism is

supposed to have worked:

. the domestic volume of money escaped the
control of national authorities and was determined
automatically by international market forces.
Monetary circulation was made up of gold and
subsidiary coin; it expanded or contracted, not as
a result of conscious monetary policy, but in
accordance with the net movements of the intal-
national balance of payments. A favorable balance
of payments brought gold into a country and
expanded the circulating medium. An unfavorable
balance produced the opposite effect.
These movements wure regarded as self-adjusting
through their influence on national price ard cost
levels and on interest rates. International balance,
if disturbed would be restored because of the
effects of the ensuing domestic contraction or
expansion on relative cost and interest levels at
home and abroad and the resulting shifts in trade
and capital movements. The automatic monetary


2See Einzig, pp. 1-16; P. T. Ellsworth, The
International Econo y (3d ed.; New York: Macmillan Co.,
1964), pp. 339-50; Brown, pp. 3-8; League of Nations,
Secretariat, Intornational Currency Experience (II.A.4)
(1944), pp. 66-112; League of Nations, Rfport of the Cold
Delegation of the Financial Committee (IIA.-KF2 (Gcnava,
1932), pp. 9-16; Roy Harred, Reforoinn the World's Mone
(New York: St. Martins Press, 1965), pp. 161-65; A. G. Ford,
The Gold Standard 1860-1914: Britain and Argentina (Oxford:
Clarendon Press, 19621, pp. 30-43; Kenneth E. Boulding, The
Economics of Peace (New York: Prentice Hall, 1946), p. 157;
and BTcoriU-eF, pp. 9-10, 47-51.







contraction produced by gold exports would raise
interest rates and attract capital from abroad.
It would at the same time exert a doMwniard pressure
on domestic prices and costs, thus stimulating
exports and discouraging imports. Both of these
movements--capital and trade--sould tend to
correct the balance of payments deficit in which
they originated. A surplus in the balance of
payments would also be self-corrective. Cold
imports would expand monetary circulation, lover
interest rates, increase prices and costs, and
stimulate capital exports and merchandise imports
while discouraging exports. These processes
would continue until foreign payments and receipts
were again brought into balance.


. : r ; -. f- r

The outbreak of hostilities in 1914 brought a

quick end to the free export and import of gold in Europe,

Subssqucntly, the exigencies of war proved to be fatal for

the international gold standard. The exchange and trade

controls, inflation, independent policy action, fluctuating

exchange rates, and uncertainty all led to its collapse.

However, the standard was not completely abandoned by many

countries and the United States in particular maintained

most of the legal aspects of its gold standard.

The financing of the war and of the postwar

reconstruction resulted in sharp and inflationary increases


3Robert Triffin, International Monetary Policie,
Postwar Economic Studies No. 7 lashington: Board of
Governors of the Federal Reserve System, September, 1947),
pp. 48-49. Also see Charles R, LWhittlesey, InLtrnational
Monetary Issues (New York: McGraL-Hill Book Co., Inc.,
1937), pp. 14-22; Michael A. Heilperin, International
Monetary Reconstruction, National Econonic Problems No. 407
Neu York: American Enterprise Assoc., 1945), pp. 8-11;
Einzig, pp. 10-13; and Hawtrey, RonLtary Reconstruction,
pp. 37-42.







in the money supplies of most of the countries involved.

This was especially true of Germany, Austria, Hungary,

Poland, Russia, Italy, and France. The belligerent

countries were unable to maintain convertibility, and the

freely fluctuating exchange rates which existed in the

follolina years

. failed signally . to restore a com-
petitive price and cost pattern cmong the major
trading nations, to induce Lhe adoption of
monetary policies conpatibl- with even a
moderate degree of stability in prices and
exchange rates, and to bring about any sort of
tenable equilibrium in the world's balance of
payments.3

In the early posttuar years it was widely believed that the

extensive depreciation of European currencies was a

temporary phenomenon and ultimately these currencies would

move upward to their prewar parties. As a result of such

anticipations, any fall in the exchange value of such

currencies nas seen as providing a moru profitable

opportunity to invest in the money assets of the European

countries. This led to equilibrating flows of capital.

However, as the abnormally large import needs of the war-

torn countries continued and the depreciation of their

currencies continued, foreign investors and speculators

became more and more wary of the one-way movement in exchange


Robert Triffin, The Evolution of the International
Monetary System: Historjcal Reappraisal and Future Perspec-
tives ("PrincTeen University Publications: Studius in
International Finance," No. 12; Princeton: Princeton Uni-
versity Press, 1964), p. 21.

51bid.







rates. Eventually a reduction in their exchange rates lost

its capital attracting ability and even came to result in

speculation that the rates oould decline further. When

this point 3as reached, additional decreases in their

exchange rates resulted in oisequilibrating capital move-

ments which further depressed the rates and set off more
6
flights of capital.

Everywhere currency and exchange disorder is
hampering trade and retarding construction. In
some countries it is a prime factor amongst
those which are causing a breakdown of the
economic and social system .


Poster recommendations for a return to the international
gold standard
It was against a background of these conditions

that thi Council of the League of Nations in February, 1920,

decided to convene a conference whose purpose was to

investigate the financial crisis and to look for ". .. the

means of remedying and of mitigating the dangerous
8
consequences arising from it." Professor Gustav Cassel,

in his advisory memorandum to the conference members,

stated:


6League of Nations (II.A.4) (1944), pp. 113-22.

League of Nations, Secretariat, Currencies after
the War (London: Harrison & Sons, Ltd., 19207, p. ix.

League of Nations, International Financial
Conference, Proceedings of the Conference, I (Brussels,
1920), 3. Cited hereafter as League of Nations, Proceedings
of the Conference, 192C.







. it seems pretty sure that most countries
look forward to the restoration of a gold standard
and the resumption of gold payments as the real
rescue from the hopeless muddle of the present
paper-money system.9

That the statesmen at the conference ucre in agreement with

Cassel on this subject is reflected in the following

resolution which they adopted:

It is highly desirable that the countries
which have lpsed from an effective gold standard
should return thereto.1u

In mid 1920 the postwar demand had almost spent

itself and the immediate postwar inflation reached a peak.

By this time, however, policy efforts to restrict expan-
11
sionary tendencies 'ere well under way. In the late summer

of 1920 there uas a sharp decline in world prices, especially

in wholesale prices.12 The only countries jhich avoided the

deflation were those Lhich experienced hyperinflation.1


Gustav Cassel, Nemorandum on the World's Monetary
Problems. Preoared for the League of Nutions XIII, 3)
TBrussels, 1920), p. 34. Also see A. C. Pigou, Memorandum on
Credit, Currency and Exchan e Fluctuations, Prepared for the
League of Nations (2XIIWI,7~ (B4russels, 1U92), p. 10 and
Kn. Pantaleoni, Mremorandum OreBared for the International
Financial Conference a't Brussels, For the League of Nations
(x111T, 6Tru:serf, 1920, P. 7.
10League of Nations, Proceedings of the Conference,
1920, pp. 19-20.

11The Federal Reserve Bank of New York, for example,
raised the rate on 90-day commercial paper to 7 percent.
William Adams Broan, Jr., The International Cold Standard
Reinterpreted, 1914-1934, No. 37 (New York: National
Bureau of Economic Research, Inc., 1940), 244.

12John Parke Young, The Internationa) Economy (4th
ed.; New York: Ronald Press Co., 1963), p. 716.
13Milton Friedman and Anna Jacobson Schwartz, A
monetary Historyof the United States 1867-1960 (Princeton:
Princeton University Press, 1963), p. 236.








The postwar depression came to an end in late 1921 or early

1922.1

In 1922, following the waves of postwar inflation

and deflation, the Genoa Conference was convened. While

the scope of the conference was quite broad, the urgency

of financial stability was made apparent by the establishment

of a Financial Commission to deal with this single subject.

The following was among the resolutions adopted by the

Financial Commission:

It is in the general interest that European
Governments should declare now that the establish-
nent of a gold standard is their ultimate object,
and should agree on the orooramme by ray of which
they intend to achieve it.15

This expression of faith in the international gold

standard is not surprising considering the attitudes of

the day. The overall purpose of the Genoa Conference was

to reestablish and maintain peace and stability in the

world, and the international gold standard ias associated

with the prewar economy and evoked visions of serene

economic progress, relative peace, and freedom from govern-

ment regulation. Furthermore, the theoretical model of the

international gold standard seemed to provide a logical

justification for this association. Even though the model

described a pure and unadulterated form of the international


141bid., p. 239. Also see Brown, The International
Gold Standard . I, 250-54.

15John Saxon Mills, The Genoa Conference (New York:
E. P. Dutton & Co., 1922), pp. 361-52.






gold standard which never existed, it still exerted a

strong influence on the international monetary system which

evolved in the 1920's. The value of the model wae not tu

be found

S. in its descriptive realism, but in the fact
that it inspired so much of the academic thinking
and legislative controversies regarding national
and international monetary mechanisms during the
nineteenth and even the tirentieth century.1


Iheo.!ld exchange standard of the 1920's: an attempt to
economie old

While the delegates at Genoa gave their approbation

to gold as one of the stabilizing influences needed by the

world, they were concerned over the possibility that a

scramble for gold might result if most countries began

absorbing gold in attempting to reattain such a standard.

Fearing a sharp rise in the price of gold as the result of

such a scramble, the members of the Financial Commission

recommended the establishment of a gold-exchange standard

which they thought would economize gold. This economy was

to be achieved by having some central banks hold claims

on foreign currencies convertible into gold instead of gold

itself as part of their international reserves.

The members of the Financial Commission also

recommended that an "international Convention" be adopted.

The purpose of the Convention would be to centralize
and co-ordinate the demand for gold, and so to avoid
those wide fluctuations in the purchasing poser of


16Triffin, International Monetary Policies, p. A9.







gold, which might otherwise result from the simul-
taneous and competitive efforts of a number of
countries to secure metallic reserves. The Con-
vention should embody some means of economizing
the use of gold by maintaining resErves in the
form of foreign balances, such, for example, as
the gold-exchange standard, or an international
clearing system.17
1 8
While such a "Convention" tas never adopted, the

recommendation that an international gold-exchange standard

be established was fulfilled during the middle 1920's as an

increasing number of countries restored their own currencies

and began to hold claims on other currencies iwilch were

convertible into gold as part of their international reserves.

Since different countries adopted the gold-exchangn standard

at various times, no specific year can be iJdentified as the

point at which such a standard began to emerge as a component
19
of the international monetary system.9 However, the gold


17 ills, p. 363. Also see Hawtrey, jon.taj
Reconstruction, pp. 122-38.
1Dean E. Traynor, "International monetary and
Financial Conferences in the Interwar Period," Studies in
Economics, XXIII (published dissertation, The Cathiolic
University of America; Washington: The Catholic University
of America Press, 1949), 143.
19
For example, the central banks of these countries
were legally allowed to hold all of their reserves in short-
term claims on foreign currencies which were convertible
into gold in the year designated: Austria (1922), Danzig
(1923), Hungary (1924), Bulgaria (192G), Estonia (1927), and
Greece (1928). League cf Nations (II.A.t) (1944), p. 30.
Legislation was passed allowing a large number of
other countries to hold part of their legal reserves in
claims on foreign currencies in the period between 1922-1931.
Among these were Albania, Belgium, Bolivia, Chile, Columbia,
Czechoslovakia, Denmark, Ecuador, Egypt, Italy, Latvia, Peru,
Poland, Portugal, Romania, Spain, Uruguay, U.S.S.R., and
Yugoslavia. League of Nations (II.A.4) (1944), p. 30.







exchange standard gained wide acceptance during tha late

1920's.20

In the interwar period as today, central bankers

were disinclined to leave the adjustment process to the

"automatic" mechanism of the gold standard, Indeed in the

late 1920's the gold-exchange standard increasingly became

a manipulated standard.21 Triffin points out that the most

significant development concerning the international

monetary system in the 1920's was that domestic consid-

erations became more and more ". . the final determinant

of monetary policies,"22

Factors of a purely domestic nature also tended to
shape monetary developments in a manner totally
alien both to the classical gold standard mechanism
and to its "rules of the game" interpretation . .
Central bank powers were no longer used to transmit
automatically to the domestic economy the upward
or downward pressures of surpluses or deficits in
the balance of payments, regardless of national
policy objectives. On the contrary, central
banking policies came to be defined less and less
uith reference to the state of the gold reserves
or the prerequisites of international balance, and
more and more in terms of domestic price stability,
the promotion of fuller employment, etc.2

20
2In 1928 foreign exchange constituted 42 percent
of the total of foreign exchange and gold reserves held uy
European central banks. League of Nations (II.A.4) (1944),
p. 35. Also see Brown, The International Gold Standard ...
1, 732-34.
21Feliks ilynarski, The Functioning of the Cold
Standard, A Memorandum Submitted to tne Gold Delegation of
the Firancial Committee, League of Nations (Geneva, 1931),
pp. 13-16.

22Triffin, International Monetarv Policies, p. 33.

23ibid., pp. 53-54.






While it would be erroneous to imply that the

prewar gold standard was entirely unmanaged,24 this change

in emphasis did become quite apparent in the latter

1920's.25


The deterioration of the interwar gold-exchange standard

Gold-exchange standards are particularly vulnerable

to the speculative flights of capital which are almost

invariably set off when those holding a particular type of

fiduciary reserve asset begin to doubt that the value of

that asset can be maintained vis-a-vis other fiduciary or

commodity reserve assets. The monetary disturbances of the

1930's as well as the post World War II problems which have


245ee Bloomfield, pp. 27-59 and Mlynarski, p. 16.

255ee Francis Cassell, Gold or Credit? (New York:
Frederick A. Praeger, 1965), pp. 18-23 who said "It is this
weakening of the link between domestic policy and the
external balance that the crucial distinction lies between
the gold-exchange standard of the 1920's (and its successors)
and the old gold standard." Also see Brown, The International
Cold Standard . I, 257-77, 672-75; League of Nations
TI-..4) (1944), pp. 66-88; Gustav Cassel, Money and Foreion
Exchange After 1914 (New York: Macmillan Co., 1922),
pp. 79-100; Edwin W. Kemmerer, Gold and the Gold Standard
(New York: NcGraw-Hill Book Co., Inc., 1944), pp. 118-20;
and Gustav Cassel, Post-War Monetary Stabilization (New
York: Columbia University Press, 1928), pp. 69-100.
". . the change is radical, and our post-War gold standard
is in reality quite a different thing from what we had before
the War. The essence of the old gold standard was that the
currency of a country was connected with the metal gold
and that thereby its value was fixed in terms of gold. . .
By being connected with gold, the monetary standard ceased
to be a standard that could in any way be 'managed.'. .
All this has disappeared. We now know that the value of gold
can be controlled by a suitable regulation of the world's
monetary demand for gold. . Our ultimate purpose is now
to give our currency a fixed value in terms of commodities."
Cassel, Post-War Monetary Stabilization, pp. 69-70.







resulted from capital flights indicate the seriousness of

this instability. The following is a brief summary of the

events to which this basic vulnerability contributed in

the 1930's.

One of the first tangible occurrences which led

to the downfall of the international gold-exchange standard

of the 1930's was the Credit Anstalt affair.26 Faced with

the failure of the Credit Anstalt, whose assets and

liabilities tiere equal to over 70 percent of those for all

Austrian banks, the Austrian government stepped in but was

only able to relieve the crisis temporarily. Worse still,

this action led the public to associate the financial

condition of the Credit Anstalt with that of the Austrian

government. Foreigners seeking safety for their funds set

off larga-scale flights of capital from Austria. The

Austrian government imposed exchange controls in October,

1931.27

The loss of confidence resulting from the Credit

Anstalt failure soon spread to Germany and capital outflows


2The Credit Anstalt was primarily a holding company
for the Rothschild enterprises. Established before the war,
the Credit Anstalt found that the market area of its enter-
prises was severely limited with the destruction of the
Austro-Hungarian customs union. When the great depression
of the late 1920'3 became more severe, the Credit Anstalt's
financial position weakened considerably and public
disclosure of its condition brought runs on that institution.
Brown, The International Gold Standard . I, 925-26.

27Leland B. Yeager, International monetary Relations
Thery, History, and Policy (New York Harper & Row, 19667,
pp. 295-96.







resulted. The Reichsbank raised its discount rate from

5 to 7 percent and obtained a $100 million loan from the

Bank of International Settlements, England, France, and
28
the United States. In June of 1931 the Hoover moratorium2

postponed payments on war debts and reparations. It was

not enough to halt the bank runs in Germany nor the flight

from the mark. A bank holiday was declared on July 14,

and by the end of July exchange controls were introduced.

In August the so-called standstill agreement immobilized

the funds owed by Germans to foreign banks.29

Initially, the flight from the mark resulted in a

gold flow into London. The situation soon reversed itself
30
however; and when the Macmillan Report3 was published in

July, 1931, which showed net short-term claims held by

foreigners on London to be aboutf254 million, confidence

in the pound was severely shaken.31 The gold flow from


28Herbert Hoover, The Memoirs of Herbert Hoover:
The Great Depression 1929-1941 (New York: Macmillan Co.,
1952), pp. 67-72.
29
2Frank C. Child, The Theory and Practice of Exchange
Control in Germany (The Hague: Martinus Nijhoff, 1958 ,
pp. 15-29. Also see Gustav Stolper, The German Economy
1870-1940 (New York: Reynal & Hitchcock, 1940), pp. 190-93
an H. Schumacher, "Germany's Present Currency System,"
The Lessons of Monetary Experience, ed. A. D. Gayer (New
York: Ferrar & Rinehart, 1937), pp. 214-22.
30
Great Britain, Parliamentary Papers, Cmd. 3897,
June, 1931, "Report of the Committee on Finance and Industry,"
p. 112. Cited hereafter as Great Britain, Parliamentary
Papers, Cmd. 3897. (This report is generally referred to
as the Macmillan Report.)

31The Committee did not expect their report to
result in a loss of confidence, but to the contrary they had






England was stanched by increases in the bank rate and

announcements of credit arrangements ofE25 million from

both France and the United States. However, lack of

confidence in the value of the pound was soon renewed by

the political unrest and the resignation of the Labour

government which followed the publication of a Parliamentary

study on national expenditures.32 The National coalition

government which subsequently came to power was almost

immediately granted credits of overd;80 million by France

and the United States. The measure worked only temporarily

and in early September of 1931 rumors of unrest in the

British Navy touched off new waves of speculation which

exhausted nearly all of England's foreign credits and

resulted in some gold outflow. This turned out to be the

fatal blow. On September 21 the Gold Standard Amendment

Act of 1931 was passed and the gold-oxchange standard was

officially suspended in England.33


the following to say about the net liability figures: "We
were prepared to find that these totals might give some
support to the fears expressed above, but in fact they are
reassuring." Great Britain, Parliamentary Papers, Cmd.
3897, p. 112. Also see Paul Einzig, World Finance 1914-1935
(New York: Macmillan Co., 1935), pp. 224-3-----1.

32Great Britain, Parliamentary Papers, Cmd. 3920,
1931, "Report of the Committee on National Expenditure,"
pp. 215-24. (It is often cited as the May Committee.)

33Great Britain, Laws, Statutes, etc. 1910-1936,
Geo. V, Vols. XXI-XXII, c. 46 (T931T-. Also see Albart E.
Feavearyear, The Pound Sterling: A History of English money
(2d ed. rev. by E. Victor Morgan; London: Oxford University
Press, 1963), p. 368 and Walter A. Morton, British Finance
1930-1940 (Madison, Wis.: University of Wisconsin Press,
1943), pp. 57-71.







When Great Britain abandoned the gold standard in

September of 1931, both foreign central banks and private

holders began to convert their holdings of U.S. dollar

assets to gold. Between the first of September and the

end of October, the United States' gold reserves fell from

their previous all-time high of S4.6 billion to

$3.9 billion.34 The contractionary effects of these

outflows of gold were accentuated by the hoarding of currency

and gold in the United States. The Federal Reserve's

response to the situation was primarily directed at

preserving the gold standard. Discount rates were increased,

and Federal Reserve Bank credit outstanding was only

$1.8 billion at the end of February, 1932, as compared to

$2.1 billion at the end of October, 1931, in spite of the

continuing depression.3

However, in March, 1932, the Federal Reserve

embarked upon an easy money policy and by December had

increased their holdings of government securities by


34Board of Governors of the Federal Reserve System,
Federal Reserve Bulletin, XVIII, No. 3 (March, 1932), 167.

35Ibid., p. 149. Also see Elmus R. Wicker, Federal
Reserve monetary Policy 1917-1933 (New York: Random House,
1966), pp. 163-71. This contraction took place even though
the ratio of gold held by the Federal Reserve to its note
and deposit liabilities was well above the legal minimum.
The problem was that the original Federal Reserve Act
required that collateral be held against the Federal Reserve
notes on a dollar for dollar basis and that the only
acceptable collateral was gold and commercial paper
discounted by borrowing banks. The Federal Reserve Act
(Approved December 23, 1913), as Amended to March 4, 1931
(Washington, 1931), pp. 37-44.






36
$1,115 million. By the beginning of 1933 there was hope

that the financial conditions in the United States were

at last beginning to improve. But when the Union Guardian

Trust Company of Detroit experienced heavy runs and failure

seemed imminent, an eight-day bank holiday was declared

in Michigan. This touched off runs on other banks and

ultimately led to the declaration of a four-day national

bank holiday on March 6th. Banks were forbidden to pay out

any coin, bullion, or currency, or to carry on any banking

business other than that approved by the Secretary of the
37
Treasury.

Even though the banking panic had subsided by the

middle of March, it was announced on April 19, 1933 that no


36Lester V. Chandler, The Economics of Money and
Bankin (4th ed.; New York: Harper & Row, 1964)7, p. 506.
Also see Wicker, pp. 177-84.
In February, 1932, the Glass-Steagall Act was passed
which permitted the Federal Reserve to use government
securities as collateral for Federal Reserve Notes for the
first time. The Federal Reserve Act (Approved December 23,
1913), as Amended to July 1, 1933 (Washington, 1933),
pp. 69-76.

37Bank Holiday, March 6-9, 1933, Inclusive,
Proclamation No. 2039, in U.S., Statutes at Large, XLVIII,
Part 2, 1689-91. Also see William Adams Brown, Jr., The
International Gold Standard Reinterpreted, 1914-1934, II,
No. 37 (New York: National Bureau of Economic Research,
Inc., 1940), 1249-52; Friedman and Schwartz, pp. 399-419;
Yeager, pp. 301-304; Hoover, pp. 196-216; Paul Studenski
and Herman E. Krooss, Financial History of the United States
(2d ed.; New York: McGraw-Hill Book Co., Inc., 1963),
pp. 376-81; and U.S., President (F. D. Roosevelt), Order
Forbidding Hoarding of Gold Coin, Gold Bullion, and Gold
Certificates, April 5, 1933, Executive Order No. 6102.







38
further gold licenses would be granted and almost

immediately the exchange rate of the dollar fell sharply.

This action marked the unequivocal departure of the United

States from the gold standard.3

Even after the de facto devaluation by the United

States in 1933 several countries remained tied to gold.

Most notable among these so-called "gold-bloc" countries

were France, Italy, Switzerland, Belgium, and Holland.

After 1931 the currencies of the gold-bloc countries came

to be overvalued and, consequently, they found it more

difficult to sell to the rest of the world, But these

countries were doggedly determined to maintain the gold

parity of their currencies. Their citizens associated

devaluation with the currency problems of the war and recent

postwar period and generally felt that devaluation had to

be avoided if the value of their products, incomes, and

savings uas to be maintained. Because of the political

unpopularity of devaluation, severe deflationary measures

were instituted in the gold-bloc countries to eliminate the

growing deficits in their current accounts. In general,

38
Twentieth Annual Report of the Board of Governors
of the Federal Reserve System for the Year 1933 (ashington:
U.S. Government Printing Office, 19314), pp. 2-3,

39This is not to imply, however, that the United
States was forced to leave the gold-exchange standard as
Great Britain was. "Tnis was a voluntary action and took
the United States off the international gold standard."
Brown, The International Sold Standard ._. II, 1255.
Yeager also pointed out: "The departure from gold was
deliberate." Yeager, p. 305.







these policies proved to bs unsuccessful and were certainly

inadequate to eliminate their overall balance-of-payments

deficits once the value of their currencies became suspect

and capital flights began.4

As a result, all of the gold-bloc countries were

ultimately forced to devalue. Belgium was the first to
41
take such a step in 1935. France suspended its 1928

gold standard law in October of 1936 though for all

practical purposes she had devalued in September. However,

France's devaluation did not prove to be large enough. In

June, 1937, the French government cut the franc from any

definite support limits.42 The franc was stabilized at

42 percent of its mid-1936 value in flay of 1938 where it
43
remained until World War II.

Holland and Switzerland devalued within days of

the September de facto devaluation of the French franc.

Germany, on the other hand, did not overtly devalue.

However, Germany already ujas making use of multiple exchange


40See Paul Linzig, World Finence 1935-1937 (Nea
York: ;acmillan Co., 1937), pp. 27-10U; Yeager, pp. 312-20;
Young, pp. 7A2-46; Brinley Thomas, Monetary Policy and
Crises: A Study of Swjdish Exporience London: George
Routledge & Sons, Ltd., 197), pp. 157-86; and John
Donaldson, The Dollar: A Study of the "Now" National and
Internation-I ritaySystem (TLondon: Oxford University
Press, 19377, pp. 164-209.
41Henry L. Shepherd, The Monetary Experience of
Belgium, 1914-1936 (Princeton: Princeton University Press,
1936T, pp. 206-10.

42Yeager, p. 319.

43Ibid., p. 320.







rates and extensive exchange controls. In the late 1930's
44
these controls became more restrictive and comprehensive.

The international monetary system which had thus

evolved by the end of the 1930's bore very little resem-
45
balance to the pre World War I system.5 Great Britain had

departed from gold and was relying on its Exchange

Equalization Account to stabilize the exchange rate of the

pound. The sterling area had come to be primarily composed

of members of the Empire. The United States had gone to

a type of managed gold standard without domestic

convertibility, and the "golden avalanche" had brought the

United States almost 60 percent of the world's monetary

gold stock by 1938. 6 France, after experiencing great

exchange rate fluctuations in the interwar period, had

managed to stabilize the franc at 8 1/2 percent of its pre

World War I gold value. However, the French Exchange

Stabilization Fund attempted to peg the franc to the pound

sterling, not gold. The other gold-bloc countries had either

left gold completely, imposed exchange restrictions, and/or


4See Gustav Stopler, The German Economy 1870 to
the Present, trans. Toni Stopler- Ne York: Harcourt, Brace
& UWord- 1967), pp. 143-50.

45See Gustav Cassel, The Downfall of the Gold
Standard (Oxford: Clarendon Press, 19367, pp. 112-34,
212-29.

46See U.S., Statutes at Large, XLVIII, Part 1, 1-8;
Frank D. Graham and Charles R. Whittlesey, Golden Avalanche
(Princeton: Princeton University Press, 1939), pp. 41-66;
Twenty-Third Annual Report of the Board of Governors of the
Federal Reserve System for the Year 196 (Washington: U.S.
Government Printing Office, 1937), pp. 8-10; and Donaldson,
pp. 50-53.







devaluated sharply. By 1939 Germany had resorted to multiple

exchange rates, rigid exchange controls, and various forms

of bilateral clearing and payments agreements in attempting

to exploit monopoly and monopsony positions in the inter-

national market. This was the general condition of the

world monetary system when World War I! brought governmental

controls over international and domestic financial

transactions to the major countries of the woi.ld which

were unprecedented in their effective application and

comprehensiveness.


The Evolution of the Internationll Nonetary
Systein Sinnce jijor ld arII


Early estea rlensa to reconstruct the international
monetary system

After the rigors of war many countries lacked the

inclination to undergo the monetary discipline which a return
47
to the orthodox gold standard would entail. It is not
48
surprising that, except in certain American circles, a

return to the traditional or orthodox gold standard was

generally not envisaged. Nevertheless, It was generally

recognized that international monetary developments must

not be allowed to become as chaotic and restrictive as

they were during the interwar and war periods. Many

proposals dealing witi how the international monetary system

should be modified or reestablished were put forward after

47John H. Williams, Postwar Monetary Plans and Other
Essays (3d ed.; Newu York: Alfred A. Knopf, 194 $), pp. 22-41.

4See Anderson, pp. 7-15.







the war. Only two of these plans will bo mentioned here:

(1) the so-called White proposal because it was adopted

in modified form, and (2) the so- called Keynes plan because

numerous plans to reform the international monetary system

which are currently being proposed are essentially the

Keynes plan with modifications of details.
49
While these plans are similar in some respects,
50
the Keynes plan5 called for the establishment of an

International Clearing Union whoso operations would be

carried out in a new form of international reserve asset

called bancor. This plan rjould make use of the overdraft

principle whereby a deficit country could obtain bancors by

overdrawing its account with the Union. Other countries

would supposedly accept the bancors thus created in settle--

ment of obligations due them by the overdrafting country.5

49
4Jacob Viner, "Two Plans for International lfonetery
Stabilization," The Yale Review, XXXIII, No. 1 (1943),
75-107.

5Great Britain, Parliamentary Papers, Cmd. 6437,
April, 1943, "Proposals for an International Clearing
Union," pp. 1-20, cited by Board of Governors of the Federal
Reserve System, Federal Reserve Bulletin, XXIX, No. 6
(June, 1943), 507-21. Cited hereafter as Great Britain,
Parliamentary Papers, Cmd, 6437, April, 1943. This proposal
was prepared by a group of English monetary experts of
which John Maynard Keynes was the most prominent.

5This plan would supposedly establish an insti-
tution whose solvency would be protected much like that of
a monopoly bank in a country in which demand deposits
constituted the only money. "The idea underlying such a
Union is simple, namely to generalise the essential
principle of banking as it is exhibited within any closed
system. This principle is the necessary equality of credits
and debits. If no credits can be removed outside the
clearing system, but only transferred within it, the Union







The potential volume of bancors would supposedly increase

over time since each country's overdraft privilege would

automatically be expanded in reference to a moving average

of its volume of trade.

On the other hand, the White plan52 called for the

establishment of a Fund into which member countries would

initially pay an agreed upon amount of gold and their own

currencies. The Fund would then, under prescribed
53
conditions, lend a member country foreign currency in

exchange for its currency. The Fund would thus act as a

financial intermediary between deficit and surplus countries


can never be in any difficulty as regards the honouring of
cheques drawn upon it. It can make what advances it wishes
to any of its members with the assurance that the proceeds
can only be transferred to the clearing account of another
member." Great Britain, Parliamentary Papers, Cmd. 6437,
April, 1943, p. 6.

U.S., Treasury Department, Preliminar Draft
Outline of a Proposal for an International Stabilization
Fund of the United and Associated Nations, April 7, 1943,
reprinted by Board of Governors of the Federal Reserve
System, Federal Reserve Bulletin, XXIX, No. 6 (June, 1943),
501-507. Harry Dexter White, then Assistant to the
Secretary of the Treasury, was primarily responsible for the
preparation of this memorandum. White had authored a
similar memorandum in 1941. See U.S., Treasury Department,
Proposal for a Stabilization Fund of the United and
Associated Nations, December, 1941.

53The Fund would sell foreign exchange to deficit
countries for their currencies if it thought the country had
or was implementing balance-of-payments policies which the
Fund thought were appropriate or if in the Fund's judgment
"it is believed that the balance of payments of the country
whose currency is acquired by the Fund will be such as to
warrant the expectation that the excess currency holdings
of the Fund can be disposed of within a reasonable time."
U.S., Treasury Department, Preliminary Draft Outline of a
Proposal for an International Stabilization Fund or the
United and Associated Nations, rev. July 10, 1943, p. 9.







but would possess no facility through which additional

international reserve assets could be created.54

The original White memorandum was modified in

March, 1942, to include a provision whereby the Fund would

lend to countries for postwar reconstruction and development.

54This plan proposed no significant departure from
the managed gold-exchange standard. As Professor John H.
Williams noted, the White plan tried ". . to preserve as
much as possible the previous role of gold." John H.
Williams, "Currency Stabilization: The Keynes and White
Plans," Foreign Affairs (July, 1943), p. 650. For a more
detailed discussion of these and other postwar plans for
international monetary stabilization see Edward M. Bernstein,
"A Practical monetary Policy American Economic Review,
XXXIV, No. 4 (December, 1944), 771-84; Imr De Uegh, "The
International Clearing Union," American Economic Review,
XXXIII, No. 3 (September, 1943), 534-56; Frank D. Graham,
Fundamentals of International monetary Policy ("Essays in
International Finance," No. 2; Princeton: Princeton
University Press, Autumn, 1943); Friedrich A. Lutz,
International Monetary Mechanisms: The Keynes and White
Proposals ('Essays in Internationa Finance," No. 1;
Princeton: Princeton University Press, July, 1943); Louis
Rasminsky, "International Credit and Currency Plans,"
Foreign Affairs, XXII, No. 4 (July, 1944), 589-603; Dennis
H. Robertson, 'The Postwar Monetary Plans," The Economlic
Journal, LIII, No. 212 (December, 1943), 352-60; Joan
Robertson, "The International Currency Proposals," The
Economic Journal, LIII, No. 210 (June-September, 19437,
161-75; Harry Dexter White, "Postwar Currency Stabilization,"
American Economic Review, XXXIII, No. 1, Supplement Part II
(march, 1943), 382-87; John maynard Keynes, "The Objectives
of International Price Stability," The Economic Journal,
LIII, No. 210 (June-September, 1943), 185-87; George N.
Halm, International monetary Cooperation (Chapel Hill, N. C.:
University of North Carolina Press, 1945); Sidney E. Rolfe,
Gold and World Power (New York: Harper & Row, 1966),
pp. -Se Seymour E. Harris, John Maynard Keynes (New York:
Charles Scribner's Sons, 1955), pp. 173-91; John Parke
Young, "Devcloping Plans for an International Monetary Fund
and a World Bank," Department of State Bulletin, XXIII,
No. 593 (November 13, 1950), 778-90; WilTiams, Postmar
netary Plans . pp. 1-60; and J. H. Riddle, British
and American Plans for International Currency Stabilization,
Occasional Paper No. 16 (New York: National Bureau of
Economic Research, December, 1943).







It would also extend credit and make investments in countries

suffering from depression.55 This addition to the original

prcpoce-l was soon dropped for reasons explained in the

introductory statement of a draft made public April 7, 1943:

It is recognized that an international
stabilization fund is only one of the instru-
mentalities which may be needed in the field of
international economic cooperation. Other
agencies are also needed to provide capital for
poster reconstruction and development, to
provide funds for rehabilitation and relief and
to prcnoto stability in the prices of primary
international commodities. There is a strong
temptation to embrace within a single inter-
national agency the responsibility for dealing
i-ith these and other international economic
problems. We believe, however, that international
economic institutions can operate more effectively
if they are not burdened with important but
extraneous duties for which they have not been
devised and for which they are unsuited. For
example, the highly specialized nature of inter-
nation-l monetary stabili ation and the provision
of lono-torm capital l culd seem to call for
separate institutions, each designed to deal vrith
its distinct problems.55



.... . -. ..... .. ...

In July, 1944, a plan to create a new financial

institution, fundamentally similar to that suggested in the


55U.5., Treasury Departnent, Pr-lr A .'"- 'Flr
I ...1 D.vE.lD c.I i. -
"r : ,. , ',,+ r; r.: -' ',r._i. ;, i_, '_ i .-.

56U.S., Trasury Depar'i .1, -. ;_, r. Nr
Pro os, .l for P S-.abi tizal io F.,- i-, I -
At .c: itn + l o ii7.o, ,''Apri 7, 1' '., i,.
In November, 1943, the U.S. Treasury Department did
,, i -, , r, ,. ,: .,, ; i _,., ,, ,,_ ,_ D r af t

. .- .: .i . v N r 24,
159 3.







White plan, was agreed upon by the representatives of
57
45 nations.57 The Internstional Monetary Fund uhlch was

subsequently esteblishcd is a pool of national currencies

from which member nations may draw certain amounts of foreign
58
currencies in exchange for their ovn currencies. The

I.M.F. obtained its original pool of national currencies

and gold through the quota subscriptions of memLer countries.

The member countries viore required to pay 25 percent of

their quota in the form of gold and 75 percent in the form

of their ouwn currencies. Under present I.Ii.F. policy a

drawing by a member which does not raisc the Fund's holdings

of that country's currency above the amount of its quota is

granted almost automatically. This is referred to as the

"gold tranch" drawing right since it repress ents that part

of the quota which is subscribed in gold. If the member

is making "reasonable" efforts to overcome its payments

problems, the Fund generally adopts a liberal attitude toward

drawings of an additional 25 percent of the member's quota

which is termed the "first credit tranche." For drawings

in the "high trenches"

57 11 T C


T ".2 Tr.. 'nOi [5 .': .', : 1 .1 .- 11.
,- ,, i.,,. I~, I ",

r i ., .. sury
:, Is of Agreement .

58Ibid.






. the Fund expects the member to laoke intensive
efforts to overcome its difficulties, usually through
a conprehensiv program of fiscal and monetary
measures.

The use of the funds acquired through I.M.F. drawings

is also restricted. An interpretation of the Articles of

Agreement held

. that the resources of the Fund are to be used
to giva temporary assistance to ra mbors in financing
balance of peyr.ents deficits on current Rccount,
and this w,'s understood to include assistance in
connection with seasonal, cyclical, and nrrorgency
fluctuations in the balance of payments.50

While later rulings did declare that drawings from the Fund

could be used to meet deficits whichh .,orn largely attrib-

utebsl to capital moveents,61 it has alrJays remained clear

that the Fund's resources are not to be used for capital

development, reconstruction, reparations, or to acquire and

hold foreign exchange reserves.6

59International Monetary Fund and the International
Bank for Reconstruction and Development, "Introduction to
the Fund,' The Fund and Sank R"vieaJ: Finance arnd
-esvj lP.1..t.. I.. l o- (June-, 1964), kB
60J. Marcus Fleming, Thr I -r '....ti 1 I^crt.'r".
Fund, Its Form and Functions, ..... .. *
fion'ta-ry Fund, 1"i67, p. 3' Also see International kionetery
Fund, "Pursuant to Executivu Board Decision No. 71-2,
September ?6, 1946," S.-I' 1 i i i '-,.- ;..- -. h .in_ '.'
Directors (2d ed.; IWaf.- ....'. I, .'. .. .:l I i lund,
September", 1963), p. 53.
61International Monetary Fund, "Decision No. 1238-
(61/43)," Sc.1ectcd Decisions of the Executive Directors
(2d ed.; R'shington: Internationai lonotary Fund,
September, 1963); p. 55. Also seo Per Jacobsson, Inter-
r, *' i r- -,- r ." i-'- l r0 r-1-r' ('Jr .shingteon:
S. , , : ,,. .' pp. 247, 285.

62U.S., Treasury Departr..rnt, Articles of
A r E m .nt_ . art. XJV, su: 1, p.. 29.
For a more detailed d ci.s:rptiorn of the origin of the
I.M.F., its original form, objct.ivres, and policies also si:







Even though the I.M.F. was established on the basis

of stable exchange rates, the Articles of Agreement provided


the following: Harry Dexter White, "The monetary Fund:
Some Criticisms Examined," Foreign Affairs, XXIII, No. 2
(January, 1945), 194-210; John Parka Young, "Conference at
Bretton Woods Prepares Plans for International Finance,"
Department of State Bulletin, XI, No. 280 (November 5, 1944),
539-50; U.S., Department of State, International Organization
and Conference Series 1, 3, Proceedin and Documents of the
United Nations Monetary and Financial Conference, Bretton
Woods, New Hampshire, July 1-22, 1944, Department of State
Publication No. 2866, Vols. I-II, 1948, cited hereafter as
U.S., Department of State, Proceedings and Documents of the
United Nations . ; Alvin H. Hansen, America's RoTe in the
World Econom (Ne York: W. W. Norton & Co., Inc., 1945-),
pp. 48-90; Lutz, passim; Ragnar Nurkse, Conditions of
International Monetary Equilibrium ("Essays in International
Finance," No. 4; Princeton: Princeton University Press,
Spring, 1945); E. A. Goldenweiser and Alice Bourneuf,
"Bretton Woods Agreements," Federal Reserve Bulletin, XXX,
No. 9 (September, 1944), 850-70; Halm, oassim; Henry
Morgenthau, Jr., "Bretton Woods and International
Cooperation," ForeignAffairs, XXIII, No. 2 (January, 1945),
1B2-94; J. B. Condliffe et al., "A Symposium on the
International Monetary Fund and International Bank for
Reconstruction and Development Proposed at Bretton Woods,"
Review of Economic Statistics, XXVI, No. 4 (November, 1944),
165-93; Dean Acheson, 'The Bretton Woods Proposals as Part
of Postwar Organization," Department of State Bulletin,
XII, No. 297 (February 28, 1945), 352; U.S., Treasury
Department, The Bretton Woods Proposals, February 15, 1945;
Paul A. Samuelson, "Bretton Woods, Pro and Con," The New
Republic, CXII, No. 15 (April 9, 1945), 467-69; "Message of
the President to Congress: The Bretton Woods Proposals,
International Monetary Fund and International Bank for
Reconstruction and Development," Department of State Bulletin,
XII, No. 295 (February 12, 1945), 220-22; John H. Willias,--
"International Monetary Plans After Bretton Woods," Foreign
Affairs, XXIII, No. 1 (October, 1944), 38-56; International
Monetary Fund, Selected Documents, Board of Governors
Inaugural Meetin Savannah, Ga., March 8 to 18, 1946
(Washington: Inter nationa Monetary Fund, April, 1946);
Murray Shields (ed.), International Financial Stabilization
(New York: Irving Trust Co., 1944); and International
Monetary Fund, Report of the Executive Directors and Summar
Proceedings, September 27 to October 3, 1946, International
Monetary Fund, First Annual etinq of the Board of Governors
(Washington: International Monetary Fund, November, 1946).







that exchange rates could and should be altered under

certain circumstances.63 However, especially in more recent

years, most industrialized countries have come to view

exchange rate depreciation as something to be avoided if

at all possible.64 The I.f.F. has generally been acquiescent

in regard to these attempts at maintaining rigid exchange

rates. Furthermore, the I.M.F. Agreement contained no

provisions for removing gold from its position as the

ultimate reserve. In fact, the Articles of Agreement stated

that


63U.S., Treasury Department, Articles of
Agreement . art. IV, sees. 1-8, pp. 4-7.

64"The Ministers and Governors reaffirmed their
determination to cooperate in the maintenance of exchange
stability and orderly exchange arrangements in the world,
based on the present official price of gold." "Communique
Issued after the Ministerial Meeting of the Group of Ten,
march 29-30, 1968, in stockholm," reprinted in "Inter-
national Monetary System," International Financial News
Survey, XX, No. 13 (April 5, 1968), 1.
". . various disadvantages are inherent in
exchange rate adjustments, and governments are properly
reluctant to resort to them--particularly reserve currency
countries." U.S., President (L. 8. Johnson), Economic
Report of the President Together With the AnnuaT Report of
the Council of Economic Advisers, 1966, p. 152. Also see
Charles A. Coombs et al., "Conversations on International
Finance," Monthl Revieus Federal Reserve Bank of New York,
XLV, No. 8 (August, 1953), 114-21; Charles A. Coombs,
"Treasury and Federal Foreign Exchange Operations and the
Gold Pool," Monthly Review, Federal Reserve Bank of New
York, XLVI, No. 3 (M-arch, 1964), 47-56; "A New Plan for
Gold," The Economist, March 24, 1952, pp. 1138-39; "Treaty
Establishing the European Economic Community, Rome,
March 15, 1957," Treaty Series, CCXCVIII, No. 4300,
Title II, chap. 2 (United Nations, 1958), 55-58; and
Robert Mundell, "The International monetary System:
Functioning and Possible Reform," The United States Balance
of Payments, Hearings before the Joint Economic Committee,
B8th Cong., 1st Sess., Part 3, November, 1963, pp. 546-47.







the par value of the currency of each member
shall be expressed in terms of gold as a common
denominator or in terms of the United States
dollar of the6'eight and fineness in effect on
July 1, 1944.

Two of the most obvious evolutionary changes in

the history of the I.M.F. took the form of quota increases,

one occurring in 1959 and one in 1965.66 In addition to

the quota increases, the certainty of the drawing rights

was increased in 1952 through the establishment of a

program of stand-by arrangements or credits. Under a

stand-by arrangement a country is assured, subject to the

specific terms of the arrangement, that it can purchase

other currencies from the I.M.F. over a specific period of

time (usually six months).67


65U.S., Treasury Department, Articles of
Agreement . art. IV, sec. 1 (a), p. 4.

66The original quotas provided for by the final
draft of the Fund Agreement amounted to the equivalent of
$8.8 billion. See U.S., Department of State, Proceedings
and Documents of the United Nations . I, 634-35.
In 1959 the I.M.F. quotas were increased by
50 percent. However, this increase was not the result of
quinquennial review provided for in the Fund Agreement
(art. III, sec. 2) but rather the result of a special
review brought about by the U.S. recession of 1958. See
International Monetary Fund, Enlargement of Fund Resources
Through Increases in Quotas, A Report by the Executive
Directors to the Board of Governors (Washington:
International Monetary Fund, 1958).
Following the most recent quinquennial review, a
25 percent general increase in quotas was agreed upon in
1965. This brought the total Fund quotas to $21 billion.
See Oscar L. Altman, "Fund Quotas Will be Increased to
S21 Billion," The Fund and Bank Review: Finance and
Development, II, No. 4 (December, 1965), 205-16.

67George Nicoletopoulous, "Stand-By Arrangements,"
The Fund and Bank Review: Finance and Development, I, No. 3








In 1962 an agrun. r,t, now referred to as the

"General Arrargements to Eorrow,a" ics reached between the
68
I.F.F. and ten of its major rnemeirs.8 Under this agreement

the Group of Ten committed themselves to lend up to

6 billion to the I.M.F. if such loans were needed.69 The


(December, 1966), 192-97. Also see Fleming, pp. 3/-35;
International monetary Fund, "Executive Board Decisions on
Stand--y Arrangements," Fj'-'.-r n-r'-frl a-_ tr tr F--_r c r
Directors (2d ed.; Washir *- i .. i.
5cptembr, 1953), pp. 24-32; Shigeo Horie, Th n'rr-a frn-
,onetary Fund, Retrospoct _nd Prospect (iNew: ..
*. 1 . I I o pp. 13)-40.
It should be noted that stand--by arranrerrients in
force have equaled almost 52 billion (1962), but at the end
of the 1967 I.F.F. fiscal year (April 30) they equaled
,401 million. International Monetary Fund, 196? Annual
~..-..r,: ..." i: T. '-.,-i: -. 1 .-n4 ,, Fj r (Wijashinr gton-
T.n8 -w . .. s n.

6Internationa [Ionetery Fund, "Executive Board
Decision No. 1289-(62/1), January 5, 1962," in 1967 Annual
F ii ; i- .' ( ashi ngton:
I'-.. . ." iI ,.i:. .,4-45. Also see
text of letter from Mr. f. W. Baumgarter to Ifr. Douglas
Dillon, December 15, 1961, reprinted in Hans Aufricht, The
Internation- !' ..-.. r i 1i...: 1 r :.. Structure e,
Functions I : I -.. >I. I r i ,' 1954), pp. 95-97.
The trin countries entering this agreement uere
Belgium, Canado, France, Germany, Italy, the Netherlands,
Smeden, the United Kingdom, and the United States. These
are the so-called "Group of Ten" countries.
69The Articles of Agreement provided tto iarys L'y
which the Fund's resources might be increased: (1) through
increasing quotsr, and (2) through arrangements whereby one
or more Fund members agreed to land their currencies to the
Fund under agreed terms and conditions. The Fund cannot,
however, reouire that such a loen be made. U.S., Treasury
Depart'mnt, Articles of Aereoment . ., art. VII, sec. 2
(i). Also ses International i monetary Fund, "Executivc
Board Dccision 1286 -(61/1)," . -.r .r

. .. ...: I r ....... .... S) ,, r ),
pp. 56-66 and Internationrl 1oi.nt yry Fund, 196i Ann-al
Report of the Internation-' fIl onetni va Fund (, 'h hintYCn:
i'. ... I .. .r. L Funrd, 19 i 6), n. 34.








purpose of these arrangements was to provide the I.m.F.

enough currency claims so that it might help protect

members of the Group of Ten, primarily the United States

and United Kingdom, from sudden movements of short-term

funds ". . in order to avert a threat of impairment to

the international monetary system."70

The role of the I.m.F. continues, however, to be

that of a financial intermediary between deficit and surplus

countries. The Fund has, to be sure, expanded its lending

resources. Yet whether it has increased international
71
liquidity can be questioned. Neither has the I.M.F.

improved the adjustment mechanism except perhaps by helping

develop and disseminate a better understanding of economic

theory. The I.M.F. has, it seems, helped to sustain and

perpetuate a managed gold-exchange standard which is

characterized by rigid exchange rates.


Postwar changes in the international monetary system not
directly associated with the I.M.F.

Some of the postwar measures taken by England,

members of the Organization for European Economic Co-operation


70Per Jacobsson, "The Monetary Background of
International Financing," International Financino and
Investment, ed. John F. McDaniels TDobbs Ferry, N. Y.:
Oceana Publications, Inc., 1964), p. 8. Also see U.S.,
Congress, Senate, Committee on Foreign Relations, Hearings
Bretton Woods Agreements Act Amendment, 87th Cong., 2d Sess.
on H.R. 10162, march 30 and April 3, 1962.
71See Fritz Machlup, The Cloakroom Rule of
International Reserves: Reserve Creation and Resources
Transfer ("Reprints in International Finance," No. 1,
Princeton: Princeton University Press, August, 1965).







(O.E.E.C.), and the United States to reentablish and

maintain an inte-nati onal gold-exchange standard within

which more thsn one centre country exists are of particular

interest. They are evidence of the international monetary

system's haphazard postwar evol.vcomnt and its b2-ic

vulnerability to speculative expectations of changes in

exchange ra.tss and the price of gold.

Th. roster tion of Euro2.cn convertibility and the

poster o etc lino _srea.i--Although the pound sterling never

fully regained the international status it enjoyed in 1930,

it ultimRltcly r.mergod along Lith the U.S. dollar as a major

key currency in the post,'ir int'rn'ttion. gold-exchange

standard.

The United StEtEc prodded Engri-nd to restore

convertibility almost irmi;,diatcly after t'hi war. The U.S.

agreed to extend a L3.75 billion linE of credit to England

and to cancel British obligations resulting frome rartime

lrind-loase provided that England would no longer restric

payments to the U.S. for current transactions a~nt Lwould

avoid restrictions on the use of Americsn-orjnePd Stcrlini
72
balances. On July 15, 1947 England restored extra rn'n

convertibility on newly acquired sterling balances at a


72Great B: ..., r r'1 .' P ra rs, Cnd. 6708,
1945, "Financiel . .. -- i I.. i overnr.mnts of the
United Stt t and e United Kingdom." Also aso Yr,:gr,
p. 379.







$4.03 parity. This rate seemed to overvalue the pound,73

and England's problems were complicated by the impossibility

of maintaining segregation between the currently earned

sterling and the old sterling balances. Foreign holders of

sterling jumped at the chance to convert, and the proceeds

of the U.S. loan were wiped out by March, 1948. While

England's balance-of-payments position had strengthened by

mid-1949, members of the sterling area, finding their

current accounts in deficit, began to draw on the dollar

pool in London. Speculation about devaluation began, and

the difficulty of preventing speculative capital movements

under such conditions again became apparent. On

September 18, 1949 the pound was devalued to 52.80.74

In the meantime, the O.E.E.C. had been attempting

to reduce trade restrictions and improve the adjustment

mechanism among its members.75 The clearing agreements of


3See Lloyd A. Metzler, "Exchange Rates and the
International Monetary Fund," International Monetary
Policies, Postwar Economic Studies No. 7 (ashington:
Board of Governors of the Federal Reserve System, September,
1947), pp. 38-41.

74See E. Victor Morgan in his revision of
Feavearyear, The Pound Sterling ., 2d ed., pp. 414-17;
Yeager, pp. 378-83; Gottfried Haberler, Currency
Convertibility, National Economic Problems No. 451 (New
York: American Enterprise Association, 1954), pp. 16-18;
Philip Bell, The Sterling Area in the Postwar World (Oxford:
Clarendon Press, 1958), pp. 18-64; Brian Tew, International
Monetary Co-O ration 1945-63 (7th ed.; London:
Hutchinson & Co., 1963), pp. 151-92; R. G. Hawtrey, Towards
the Rescue of Sterling (London: Longmans, Green, 1954),
pp. 1-72; and A. R. Conan, The Problem of Sterlino (London:
Macmillan, 1966), pp. 1-66.

75W. M. Scammell, International Monetary Policy
(London: Macmillan, 1957), pp. 264-78; Raymond F. Mikesall,







the C.L.E.C. proved inadequate and they Ioreo replaced by
75
the European Payments Union (E.P.U.) in 1950. The

experience of the E.P.U. has obvious implications for the

contemporary question of houj to allocate newly created

reserve assets among countries. Under the Europern Payments

Union Agreement any member country jould provide its own

currency to any other member who nocded it for purposes of

maintaining a stable exchange rate. The bilateral dabts

and credits of each imemn.ir i would be reported monthly to the

Union whore the bilateral claims of all members !would bn

consolidated and netted against each othsr. Still all net

claims did not hove to be settled in gold or dollars. Each

member was assigned a quota, and surplus countries were

required to grant credit in amounts of up to one-fifth of

their quotas to countries in deficit with the Union, After

the one-fifth quota limit :as reached, net deficit positions

had to be settled with an increasing percentage of gold.

Under this arrangement there proved to he a strong tendency

on the pPrt of some members to run up deficits uhich were

guaranteed to be covered by other Union members. In 1954

the Union Agreement luas modified so that all debit positions


For-r r. 7 I'-rn~ in the -' W r World (Nt':e York: Twentit th
"-"'' 'i' I '. '-; ,p I'. i 7 and "Robert Triffin, Europe
and the, ,:oncy lijudd'lo (Ne:u Haven: Yale University Press,
1957_, pp. 148-49.

76Its meimbrs a urrn Austria, B.lgium-Luxombourg,
Denmark, France, Germnny, Grorce, Iceland, Italy, the
Netherlands, NorWay, Pertugnl, S"iodrn, Sriiterland, Turkey,
the United Kingdom, and Ircl. nd.








within the quotas had to be covered by a 50 percent gold

pa yent.77

On December 27, 1950 nost of the mrn.ber countries

restored the external convertibility of their currencies.

Accordingly, the E.P.U. was dissolved and the European

Monetary Agreement automatically caFe into effect.7

77
For a more detailed discussion of the European
Payments Union snd its operations see: Robert Triffin,
Ti (N ii, Haven: Yale Univcer; ity Preos,
, uroppn Paymentis Union, F' '" Annual
. i :,* I I* 1

August, 1951), pp. 11-20; RTnd3ll HinhaF,, TemFrvd Europer.
rnn, ti : i i 't-' ("essays in Intein tion l Finin I;
: *. nceton University Press, Knveplbr 1959),
F. ,, :..,'F : .r --- r, .. ir _-- .. of
o i

J. E. M[adce, The Atlntic Conmrunity and' th; Doi,r CG
(London; Fri ... .. l-s ), o .
..n'F l. '-rt F fr, t"- r.--. .- .1 C '-

r .,. . ... .. -L_., .. 1 -"
June, 1954).

78he European monetary Agreement and their insti-
tutions formed under it, the Europcen Fund and the
Multilateral System of Settlemnnts, seem to have been
relatively insignificant factors in the postwar monetary
history of Europe. Hoe-ver, the interested reader is
referred to: Drganization for European Economic Co-operF-tioon
faemorEndum of ths Sccrctar y-General "r' A---ti- -7

E,-. -. . .._.. _. .. ... I * Drganization for
S.. .', .- l. .., .. ,.,., .. _- t, 1955), pp. 14-36.
Also see Robert Triffin, :-- F_. ,;. f L;. C,, ,-F .
System, Wicksel] Lectures i -:i.-. : I
Society, 1958), pp. 37-43; European Paynents UniLon Fifth
AnnuEl r- -l '.: i Year 19n.'55


s .. : ... II,







Through this process of evolution and changing legal
79
agreements, the sterling area has continued to exist.

When convertibility was restored in 1958, the pound was

stabilized in terms of dollars, not gold. But with the

dollar being defined in terms of and convertible into gold,

the pound was indirectly stabilized in terms of gold. Two

significant institutions both referred to as "pools" grew

out of this arrangement. The so-called dollar pool is the

stock of dollar claims held and managed by the Bank of

England. Because the sterling area members hold a large

portion of their reserves in sterling and do much of their

international banking in London, earnings of foreign

currencies including dollars are generally exchanged for

sterling claims at the Bank of England. The members of the


79The natural evolvement of the sterling area and
its raison d'etre have been well documented. See the
following: A. C. L. Day, The Future of Sterling (London:
Oxford University Press, 1954); Paul Louis Jean Bareau, The
Sterling Area: What It Is and How It Works ("British
Commonwealth ATfairs," No. 3; London: Longmans, Green &
Co., 1948); The Pound Sterling and Sterling Area After
World War II-T"NuT York University Publications: Institute
of International Finance Bulletin," No. 140; New York:
New York University Press, 1945); Dennis H. Robertson,
Britain in the World Economy (London: George Allen & Unwin,
1954), pp. 32-52; Bel, assim; A. R. Conan, The Rationale
of the Sterling Area (London: Macmillan & Co., 1967i Roy
Harrod, The Pound Sterling ("Essays in International
Finance," No. 13; Princeton: Princeton University Press,
1952); S. I. Katz, "Sterling Instability and the Postwar
Sterling System," Review of Economics and Statistics, XXXVI
(February, 1954), 81-87; Paul Louis Jean Bareau, The Future
of the Sterling System (London: Institute of Economic
Affairs, 1958); Feavearyear, paesim; Hawtrey, Towards the
Rescue . ; Peter B. Kenen, British Monetary Policy and
the Balance of Payments 1951-1957 (CamSridge: Harvard
University Press, 1960); and R. G. Hawtrey, The Pound at
Home and Abroad (London: Longmans, Green & Co., Ltd., 1961).







area drew against this pool to obtain dollar claims n:rded!

to settle obligations with non-membor countries requiring

dollar payments.

The other "pool" was the so-called Group of Ten's

London gold pool. This was a pool of currencies trade

available for stabilizing the price of gold in the London

gold market. The gold losses junich occurred riere shared

among the group rimbers on 0 quota basis.

While the gold pool no longer exists, the sterling

area does. It is continue lly plagued by thn problems of

speculative floors front one fori of intnrnartionl rserve

to another. The problem was sue T od up in a mrnorandim

submitted by Her Majesty's Treasury to the Hadcliffe

Committee:

World trade depends upon an ade uate payemots
mechaniSrm. It is vital to the United Kingdom that
such a richanismr should be maintained, both because
of our national interest in worldd economic progress
and because of our dependence on international
trade. Starling plays the major role in this, and
there is no substitute for it. Certain particular
advantages flow from this position of sterling.
First, United Kingdom citizens because they are
able to use their own currency over a large part
of the world, are themselves saved the inconveniences
of operating in foreign currencies, and they have
access to vital raw materials on the most favourable
terns on the commodity markets established in the
United Kingdom. Second, sterling as an international
currency brings similar advantages to the other
members of the sterling area and to the commonisalth
as a whole. Finally, the banking, insurance and
similar transactions carried out in London based


80See Charles A. Coombs, "Treasury and Fed ral
Reserve Foreign Exchange Operations and the Gold Pool,"
Federal Reserve Bulletin, L, No. 3 (March, 1964), 294-307.







upon the international character of sterling are
in themselves profitable.
But the counterpart of these advantages is the
greater risks to t'iich we are exposed from the
considerable sterling balances which other countries
hold. L hcnever doubt is cast on our solvency these
balances cone under pressure, thus tending to
aggravate the very situation that caused the doubts
to arisa.


The dollar _as apostjar key currency and some ad hoc

measures takc'n to protect it.--Immediately following World

War II the U.S. dollar was the only major currency which ias
82
fully convertible. Even though the United states

transferred over S33 billion of goods and services exclusive

of military items to the rest or the world through gifts rnd

loans between 1946 and 1953,83 this period has often been

described as one in which the rest of the world suffered a

"dollar shortage."84 The definition of a dollar shortage,

81Great Britain, Her Majesty's Treasury Comrittte on
the Working of the Monetary System, "The Sterling Area,"
;,.-: I.- f- .- -.-.-i .. ,.".*.'once, Vol. I, pars. 6, 9
S . i .... rest Britain, Parlianentry
Cmad. 827, August, 1959, "Report of the Commiiittee
. Working of the Ponetary System (The Radcliffe
Committee Report)," pp. 224-68,

82The United States was still under the obligation
arising from Lhe Gold Reserve Act of 1934 to convert
official foreign dollar holdings into gold at $35 an ouncu.
83
3 P r re-, sentt.d to 'i.. C .. -- r .
Forpinn E .: -, ,
(U lin ten: US. G, .. ,', . february,
1954), pp. 6-22.

4For a detailed discussion of the dollar shortage
sen: Charles P. Kindleberger, Tha DRoll :r Shortaee (N'era
York: The Tochnology Press of' f.I.T ? John" lilf-y & Sons,
Inc., 1050); Charles N. Henning, Intren tinnal Finnnoe
(NEror York: Harpar & Bros ., 1958)' pp) 1 -416; Roy Harrod,
"iiibs lntli-o of Inltrn'ationil Payrmnrits," Internnitinnal
Loretary .f'end Staff PaJp -, III (April, --lJ3), 1-/4; Elliot







the actual existence of such a shortage, and its duration

have been thoroughly debated.85 Houtevr, t'o things seen

clear: (1) foreign countries tere not building up reserves

in the form of dollars to any large extent in the late 19/0's

and early 195D's and (2) the practical urgency of the

problem t as eliminated by th' continuing U.S. balance-of-

payments deficits -'hich Lbean in 1950.

The persistent deficits in the U.S. balance of

payments jere at first Is'lcomd as a r means iwitreby the rest

of tne torld could rebuild reserves thich the uar end postLar

reconstruction had depleted. Huoeruver, in th, letter 1950's

widespread concern over the continuing Ul.S. deficits rose.

The situation .as stated succintly in President Kennedy's

1951 White House Message cn the balance of payimentn and

gold outflow:


Zuppnick, Britaiir r. I- Pr3bl C (Ni c York:
Columbia Universit, i- .,, I .,: f acDougall, nTh
World Dollar Problet (London: Macnillan, 157); Mirol ev A.
Kriz, PostI r T.-- -.' ..... I ("Essays in Inter-
national Financ," .; .: Princeton University
Press, Spring, 1947); and Erik Hoffrieyer, F .1i ....:. : ri
ti; 't ,- ..f LI.. _r. :-' r Trade (Copenh-gen:- E'jnna


85Charles P. Kindleberger, "The Dcl.lr Shortage
Revisited," -. -, .:. -, .I .- r ; , XLUIIJ (June, 1958),
388-95; Raynm: i. *"- i Shorta o : A f.nod-rn
myth, .i:-. , r- :1i r 1 r.: ,.: i( l- 1959),
307-309 .: I ., : !. ...
Rea c ts :- I'"1_" -=, : ,, ,- ,, I .,,.," .,." "''" ,. .." ,_,o 3 5 .
Princton- Princeton University Press, Novwmber, 19505; and
A. R. Conan, "The United States Balance of Payments in

.. . .. .. ..- .-.-. I
7: *, C, ,I i -







For tho past decade our international
transactions hovo resulted in a deficit .
The surplus of our exports over our imports . .
has not been largo enough to cover our
expenditures for United States nilitnry establish-
ments abroad, for capital invested abroad by
private American businesses, and for government
economic assistance and loan programs. All of
theas outlays are essential .
S. this growth in dollar holdings placcdi
upon the United States a special rasponsibility--
that of maintaining the dollar as the principal
reserve currency of the free world .
In 1958 and 1959 the deficit in our balance
of paynrnts sharply inc-,easfd--to S3.5 billion
in 1958 and to $3.3 billion in 1959 .
However, in these years, unlike the period
1951-57, the deficit resulted in large transfers
of gold to foreign accounts as uell as a further
increase in foreign dull-r holdings. These gold
transfers . reflect a decision by foreigners
to take more of their earnings in gold and to
hold less in dollars.

The United States has responded to the continuing

deficits End gold outflows primarily with stopgap measurns

rather than applying the "classical medicine" of more

restrictive monetary and fiscal policies. These measures

hava primarily been aimed at warding off crises rather than

eliminating the inherent instability of the present inter-

national monetary system which is at the root of the crises.

Furthermore, many of the measures taken tend to exert a

restrictive influence on international trade and capital

movements.

The first major stopgap measure was initiated in

19G1 when the Federal Reserve System began to make reciprocal

b6U.S., President (Kenn'dy), ,scianrn from the
Presid-tnt Rltif in. i. H.1 7 innrce of Fp F*unts and tih'
I I Sates, b87Th Cong., 1.t SCss.,
1 1 1 House D c) C., pp. 1-3.







currency arrangements jith other major central banks in an

attempt to minimize U.S. gold losses. These sriqp arrngce-

ments are bilateral agreements which create reciprocal

stand-by lines of credit twhreby a central bain obligates

itself to exchange on request its currency for that of its

partner central bank up to snrcr drsignted amount for a

specific period. The suap troncnctions ar-, al iay rteversOn

at the original exch nge rate. For exc.ple, the Federal

Reserve can usu its credit line and obtain from a foreign

central bank a claim on that bank's currency. Thr Fedcral

Reserve can exchange the foreign currency claimri so acquired

for dollar claims alrc dy held by the foreign central bank

partner. The foreign central bank will thus hCve exchanged

dollar claims which rere subject to the risk of a change

in the exchange rate for dollar claims with an exchange

guarantee. When pressure against their dollar is eczrd, the

Federal Reserve must accurulatc a large enough amount of the

foreign currency involved to repurchase the dollars hold

by the foreign central bank partner and liquidate the
87
swap.


87Federal Reserve Bank of Atlanta, "Central Bunk
S'uaps--A Bulnoark of International Mlonetary Cooperation,"
:. .1 ,.- .;.-: December, 1967, pp. 162-67,
r : ...'.i be noted that the Federal Ruserve
reciprocal currency arrangements amounted to Z7.08 billion
as of March 8, 1968. Charles A. Coombs, "Treasury and
Federal Reserve Foreign Exchange Operations," F-n '-i
_ _- r .: L l '-- LIV, No. 3 archc, 1968), 2 ". :
i. -., ,. r D pari, ,-, .
of the Unit ed Stat es Do .- "
January, !958, pp. 22-23.








If the prEssureb on thL dollar are longer lasting

than the duration of the svap agreements, the Treasury

rust acquire the necessary foreign currency claims by

the sple of gold, I.M.F. drawings, or through the sale of

so-called Roosa bonds. Roosa bonds are medium-term

obligations of the U.S. Treasury which are normally

denominated in the currency of the purchasing country.8

Another major step to protect the dollar came in

the form of the Interest Equalization Tax. This tax,

effective July 19, 1963, ass specifically imposed to increasE

by 1 percent per year the cost of long-term capital funds in

the U.S. capital markets to borroviirs in foreign indus-
89
triplized countries. The tax is currently imposed at an

annual rate equivalent of 1.25 percent.90

The Interest Equalization Tax vias supplramntcd in

February, 1965, by the Voluntary Cooperation Program for

business firms. This program was basically a request for

U.S. firms to Ettempt to achieve greatri net Pexorts, return

more foreign earnings to the U.S., and to postpone direct


8The amount of these nonmarketable U.S. TrasEury
Bonds and Notes held by official institutions of foreign
countries totalled $1,479 million as of February, 19E6.
Board of Governors of the Federal Reserve Systen, Federal'-
Reserve 9ulletir, IV, No. 3 (March, 1968), A-74.

9U.S., tatuts at _Larg', LXXVIII, 563. This was
extended to cover bank lo ns of rore than one year's
maturity in February of 19G5. See U.S., Statuftes_ at rmg,
IXXIX, ?43.

90U.S., Treasury Department, maintaining tihe
strir.q"h.. ., ..-, p. 15f.







investment in developed countries. The Voluntary Foreign

Credit Restraint Program for banks and other financial

institutions, announced at the same time, requested that

these institutions not exceed specific ceilings in their
92
foreign loans and investments. On the 1st of January,

1968, an executive order transformed the Voluntary

Cooperation Program for business firms into a mandatory

program but greatly reduced the amount of capital outflow
93
allowed.93 Among the provisions of this executive order

were:

1. that a moratorium would be placed on any new

capital outflows from the United States for direct invest-

ment into the highly-developed countries, principally those

of Western Europe;

2. that for the less-developed countries, taken

as a group, U.S. companies may not make a combination of

annual new direct investment and investment of retained

earnings which exceeds 110 percent of their average annual

new direct investment which took place in these countries

during the 1956-65 period;


91U.S., President (L. 8. Johnson), "Reviewing the
International Balance of Payments and Our Gold Position,"
Message from the President of the United States Relative to
Review of International Balance of Payments and Our Gold
Position, 89th Cong., 1st Sess., February 10, 1965,
House Doc. 83.

92Ibid., pp. 2-6.

93"Executive Order 11387 Governing Certain Capital
Transfers Abroad, January 1, 1968," Weekly Compilation of
Presidential Documents, IV, No. 1 (January 8, 1968T76-277.








3. for a certain group of countries which include

Canada, Japan, Australia, NcS Zealand, the United Kingdom,

and some of the oil-producing countries, U.S. companies are

allowed to rake any combination of annual new direct invest-

ment or reirnvcstment of retained earnings thich does not

exceed 65 percent of their average annual Oirect investment

plus their reinvestment of earnings vhich took place in
94
1965 and 196 ,

In JFnuary, 1968, the guidelines issued under the

1965 Voluntary Foreign Credit Restraint Program Were

revised to further restrict U.S. lending abroad, especially
95
to the countries of Ws.stern Europe. Furthermore, the

President, by granting the Board of Governors authority to

make the guidelines mrrndatory, in essence imposed
9,5
discriminatory exchange controls.


94Ibid. It should also be noted that this order
imposed mandatory repatriation requirements upon U.5. firms.

"See Board of Governors of the Federal Reserve
System, "Revised Guidelines for Banks and Nonbank Financibl
Institutions," FFderal Reserve Bulletin, LIV, No. 3
(Karch, 1968), 57I-65.

9The Presidrnt ordered thprse measures be taken
by virtue of the power vested in him by sec. 5b of the act
of October 6, 1917 as amended (U.S., Code, Vol. XII, 95E)
and the naticnil ear:rgancy declsrrd on Dicepmber 16, 1950.
The ame nded 1917 act declares that "During Line of nar or
during any othrr .priod of national emergency declared by
the Pt idFnt, the President may, through any agency that
he may designate or otherwise, investigate, regulate, or
prohibit, under such rules and regulations as he nay
prescribe, by means of ijcensrs or otherwise, any
trns action- in foreign cxchan r, transfers of credit
bet',:e.n or p yments by banking institutions as clfined by
the Presidr-nt' . ." U.S., Code, Vol. XII, 95n. Also
si U.S., Prrident (Trou n), Iroc'lamaticn No. _2914,







These policy mna'urcs notwithstanding another crisis

for the international rronretary system end tie dollar was

set off by England's deva lution in Novemter, 1957.97 Ey

early 1968 speculation agi-nst the dollar mounted to such

an extent that on "'arch 14 the day's turnover of gold in
98-
the London market was reported at 3440 million. As a

result, the London Gold VErket aes closed and on arch 17th

the governors of the central banks of the Cold Pool Nations

released a press statement which included the following

points:

. the U.S. Governrent cill continue to buy
and sell gold at the existing price of T35 en
ounce in transactions .ith monetary authoritlrn.
The Governors agree d to cooperate fully to
maintain the existing purities as Vnll as orderly
conditions in their exchange markets in accordance
with their obligations under the Articles of
Agreement of the International Monetary Fund. The

.. 1"' .r.-nr . -f c -rr 1

It should also be noted that exchange controls
affecting the individual U.S. citizen have also beon imposed.
For example, Executive Order 11387 of January 1, 196B
declared: "1. (a) Any person subject to the jurisdiction
of the United States who, alone or together with one or more
affiliated persons, owns or acquires as much as a 10i
interest in the voting securities, capital or earnings of a
foreign business venture is prohibited on or after the
effective date of this Order, except as expressly authorized
by the Secretary of Commerce, from engaging in any transfer
of capital to or within any foreign country or to any
national thereof outside the United States." Weekly
Compilation of Presidential Documents, 1V, No. 1, 26-27.

7See First National City Bank of New York, "General
Business Conditions," monthlyy Economic Letter, December,
1967, pp. 133-36 end FT ". '.. ..T L,- .L-. of PNEiW York,
"Sterling Devaluation and Its Aftermath," ibid., pp. 135-38.
98
"Gold Trading is Halted in London for Today:
Federal Reserve Lifts Discount Rate to 5%," The Wall Street
Journal, iMarch 15, 1968, p. 3.








Governors believed that henceforth officially-
held gold should be used only to effect transfers
among monetary authorities, and, therefore, they
decided no longer to supply gold to the London
Gold Frkct or any other gold narket . .
They no longer feel it necessary to buy gold front.
the market. Finally, they agreed that henc-forth
they will not sell gold to monetary Lutl cities
to ropl]ce gold sold in private markets. -

This action, of course, resulted in a two-tier price system

for gold, The continued existence of such a system is at

best very uncertain.




The international monetary system which exists todc.y

is based on a gold-cxchEnge standard, but a gold-axc hango

standard which differs in many anys from those of the pact.

Today th' objectives of economic policy include only

iir. ecItly the maintenance of the gold value of the currency.

The objectives of stable price levels, high levels of

employmnnL and production as well as a sustained lIigh rate

of economic growth are now given priority. Nevertheless,

the essential characteristics of the gold-exchange standard

still exist as is exemplified by the fact that at the end

of Decenbor, 19u7, U.S. liquid liabilities to foreigners

totalled almost $16 billion, $14 billion of which was held

by official foreign institutions, while U.S. gold reserves


9Y"Text of Statuie!unt by Governors or Centrel Snnkl,"
The ely _Bond Buyer, CLXXI, No. 3911 (earch 25, 1968), 10.
It should bn noted that on March 18, 1968 the
United States cl.iminuted the rrcuirel..nnt that each Federal
Reserve ; nk had to maintain reserves in the form of gold
certificitns of noLt les' than 25 percent of its Frdenr:l
Reserve Iotes in circulation. U.S., SttiAt ute Lo_. r ,
LXXX, 269.







amounted to approximately 512 billion.100 Ho ever, the

present system is basod on a tuo-tier price system For

gold. Tho system is furthermore bolstered by numerous

bilateral ad hoc agreements cost of which take the fornl of

credit lines extended fur short periods or time only.

Finally, the persistent dcficit- in th. U.S. bPlence of

payments have resulted in exchan>.e rIstrictions being inposud

on the U.S. dollar, the r joi k y currency of tht present

international rnonetary system.

That these rer sires n rre deemrd necessary id

indicative of the basic vulnerability of th: prn Elt i;i'tr-

national monetary system to speculative cxpict.'tions of

possible changes in gold price and excninnge rate. It

should tharefora be apparent that before o ny plan to modify

the present international ronetary systmni is adopted,

careful consideration should be givwn to its likely effect

on uorld expectations about the future chhrcter of

international monetary reserves,


'00Federal Reserve Bulletin, LIV, No. 3, A-68,
A-70,













CHAPTER II


THE DILEMMA OF THE PRESENT INTERNATIONAL MONETARY SYSTEM:
A POSSIBLE SOLUTItD AND A QUESTION THAT MUST
BE DEALT WITH


The Oil irni

A question of current concern is ilheather or not the

future need for international reserves v.ill be adequately

provided for undor existing Internatlonal ronotary arrungc-

ments. An amount of international reserves can bo inadequate

in the sense that it is too small to support an increase in

international transactions. In order to focus on this

possibility assume that the present amount of internati oin,

reserves in at an optimum Icvel relative to tho current

level of international iransactionE. Under such n ccnditicLn,

if additional real international transactions are to be

forthcom,,.ij, theIy must be accompanied by an increase ir

international reserves barring any decrease in price levels

and/or improvement in the baeance-of-payments adjustTimnt

mechanism and/or improvement in the international money

mechaniam. This proposition is anslagoius to the concju.iion

drawn fron an applicationn of thu quantity theory of monoy

to a domestic economy (i.e., unless the price Icvil falls,

or the voloclty of money increases, or tho payment system

becon.rs more efficient, wddi.tions to Lhe 'i.uney supply iill

52







be required in order to support a larger volume of real

transactions). While the proposition that a direct

relationship exists between the required level of inter-

national reserves and the volume of international trans-

actions may be acceptable to most students of the

international monetary mechanism, there is by no means

agreement about how to define quantitatively an optimum

level of international reserves. Consequently, there

presently exists a great deal of disagreement over whether

the present level of international reserves is excessive,

deficient, or optimum. This question has been taken up

at some length in the literature and will not be dealt

with here.1 However, it would seem that the majority of


1See Fritz Machlup, The Need for monetary Reserves
("Reprints in International Finance," No. 5; Princeton:
Princeton University Press, October, 1966); J. Marcus
Fleming, Toward Assessing the Need for International
Reserves "Reprints in Internationa- Finance," No. 58;
PrincFeon: Princeton University Press, February, 1967);
Fritz Machlup, World Monetary Debate--Bases for Agreement
("Reprints in Internationa Finance," No. 4; Princeton:
Princeton University Press, September, 1966); J. Amuzegar,
"International Liquidity: Meaning and Significance for the
Haves and Have-Nots," The Indian Economic Journal, XIV,
No. 3 (October-December, 19667, 338-52; "International
Liquidity and Reserve Creation," 1966 Annual Report of the
International Monetary Fund, pp. 9-20; Edward M. Bernstein,
"'Th U.S. Balance of Payments and International Liquidity,"
Statement in Guidelines for International Monetary Reform,
Hearings before the Subcommitte aon International Exchange
and Payments of the Joint Economic Committee, 89th Cong.,
1st Sess., 1965, pp. 320-44; merlyn N. Trued, "Excerpts
from Speech of Merlyn N. Trued, Assistant Secretary of the
Treasury for International Affairs, June 16, 1965,"
Reprinted in Guidelines for International monetary Reform,
Hearings before the Subcommittee on International Exchange
and Payments of the Joint Economic Committee, 89th Cong.,
1st Sess., 1955, pp. 214-20; Robert A. Mundell, The
International Monetary System: Conflict and Reform
(Montreal, Canada: Private Planing Association of Canada,







writers dealing with this subject conclud.. that while

thfre may not presently be any scarcity of Jnternational

reserves, the international ronatary system. in its present

for;., till not be capable of providing the EddiLional

reserves which a continued gror-th in internattionl trarns-

actions ihill require in the foreseeable future.


196t ), pp. 1 Z-31; Gerald A. Po .ack, "Perspectives on the
Unitne S.Ltos Intarnatiioal F n:nci;al Pc ition," The
Unitnd St i-L ..;nce of PFeyr' ntL -PorE cctive. rr.-l P.-. -
Joinit Econnj.t Co miitter cBth Ccng., 1st Sess., '
pp. 53-55; Ce.orge H. Willis and Frod I. Springborn, The Neor!
for Internationnl FResetivus (Ilashington: U.S. Troesury
Dupiltlmntbpt 196'pue I); Frederick L. Doing,
"Sthter.,.nt," in PlIn for Intern t tion' 1I onet.ry Rsrv ,
Hearing before the Subconi:.it'oc on Itrn';tetioneil Fxci ngi ;nd
Payments of the Joint Economi.ic Co .:iittee, 90th Cong., 1st
Sess., Septoeber 14, 1967, pp. 21-23; Henry H. roFalr,
"Statem int "' in I,. 'i ..... .- .._.- s v
Hcsring before t',. ._. .. . ... . ,: i i ~on'o and
Psymcnts of the Joint Economic Committci- 90th Congi, Ist
Sess., Septem.ber 14, 1967, pp. 10-12; Henry C. U-llich,
"Stoatmeint," in Guid lin: _rs f _r Intr r -l--1 --.'--. P-P.-m,
HoarinCs before the S'hec' inittee on i .. i .i -
and Payrents of the Joint Econeoric Comiiitter, C9tlh Conr.,
1st Sess., P rt 1, July 27, 28, and 20, 1965, pp. 79-03;
U.S., Congre-S, Subcominmittoen on International Exchange and
Payments of the Joint Econonic Comrmittee, GuirJdllnrs for
S.. i 'e Internati'on'al lonetnry Sytrlt', Joirnt Co ti it.te.
-i..1, I Cong., 1st Sass., 1965, pp. 1I-0; Ecenomic s Rport
of their Presidant Toonther uith the Annup.J Rocrort c thl
Counci l o Econo icn Advise rs *, ," 'r e n.
Frin 'ing f ]i cc7 Tc . .. I to the Congr!ss, FebTuien y,
1968), pp. 178-86; Roy Harrod, "The Doll.:r Prc-.liu ,i nid tlhe
Gold [tuostion," -'. ,.i' i ' ed. Scyn our E. Harris
(Neo York: Harcc i ., Inc. 1961), pp. 46-62;
O[a:ir L. Altiman, "Profescer Triffin, Internrtiono l l..iqiiij'j. y
and th r.nternotional Mionetary Fund," Th n Dollar in Crnsin,
ed. Sey.lour E. Harris (Ncrt York: Hrcour t BrEc~e & B oird,
Inc., 1 1'C), pp. 255-62; Robert Triffin, [:pld _and the Doll r
C.ri.;is (nim. ed. ; NimJ Haacn: Yale University Proe.-, 19bl',
pp. 35-58!; Ar, l l G;rihai, Inrl.ri':ntionil.1 Liquidity _pnd the
Dot fI A cinq, 1D (Loneon: Lcc no iic nJ i'vjlopsnt RLO sioarch,
LT'., ")T, pp. 5-15; and Rr -rt of th.i '.tudy Group w ct
Crnatic.n of rie r. Asr.ets Rp! rt to thr D..putien of the
Group of ln ( ,r u ]t ) ~ I~ B l inkt of Ituly Press, r1lay 31, i'i6 ),
pp. 17-20.







The prediction that thir international monetary

system, if not E cnnhTo' notified, Wtill fail to meet the

world's required nt for inteirntional reserves can be

logically supported. Under the present international

monetary system additions to the tiorlri's supply of inter-

national reserves must take one of two forrs. On thl

one hand, additional international rcservcs can coin about

through addition to the world's stock of monetary giold

reserves. On the other hand, nr international rEsot)vp

can be forthcoming in the forr: o" additional shrt -tr;c

claims held by monetary authorities on the conVertible

currencies of other countries,

Additions to the oorld's staoi: of intltrntion i h

reserves in the forum of gold, assuming e constant price

of monetary gold, can come about through either acaditiuon:

production or cdishoarding of that metl,. It has generally

been held by most recent luriters that future additions to

the rjorld's stock of internatiDnal resctrve front these

sources is likely to be erratic end smell relative to both

the current stock of reserves and future needs.


2See Triffin, .',1 -. it ti J.:.'I i s, pp. 50N-E53
Oscar L. Al n man, "A Noi .. i. i ,... ...' d Additj on
to International Gold Reseruss," int- -...' 1 r:
Fund Staff Prpers, VI (A.pril, 195 ,, ... ~ : ,'lup,
"Proposis loi FReforn of the International Flonettry
System," FL._ '.: ;' :,.-. .-.1 ...- i. : E Bnlance of
pay cents, .. : :. : i ,. ;. . ,or tihe S iubcom-
mittee on International Exchange and Payments of the Joint
Economiic Committee, Joint Committee Print, 87th Cong.,
2d SeEs., 1962, p. 211; Internatii onal ionctery Fund, 1966
Annual Report ., pp. 12--16; Robert Z. Aliber, Thil
. k :. ' '. r (64 r l it
York: Fredetr"' i i", "u I ', 6';ltaroslav







Since the issuance of the gold policy communique

on May 17, 1968 by the Governors of the central banks of

Belgium, Germany, Italy, the Netherlands, Switzerland, the

United Kingdom, and the United States, it has become even

more unlikely that future needs for international reserves

will be completely met in the form of gold. In the

communique the Governors stated that in view of the

present plans and efforts to provide for additional inter-

national reserves which would be fiduciary in nature, they

felt that the existing stock of monetary gold was

sufficient. They therefore stated that it was no longer

necessary to buy gold in the market nor would they sell

gold to other monetary authorities so that those authorities

could replace the gold which they had sold in the market.

If gold must play a decreasing role in the

provision of international reserves, as indeed seems to be

the case, then under the present international monetary

system the larger part of the burden of meeting this need
4
would fall on the so-called "key currencies." Herein

lies the source of the dilemma. Aggregate foreign-held


A. Kriz, Gold: Barbarous Relic or Useful Instrument?
("Essays in International Finance," No. 60; Princeton:
Princeton University Press, June, 1967), pp. 23-24.

3The Weekly Bond Buyer, CLXXI, No. 3911, 10. Also
see Federal Reserve Bank of Atlanta, "Gold Policy
Communique," Monthly Review, April, 1968, p. 51.

A "key currency" can be defined as the domestic
currency of a country which other countries are willing
to hold claims on as part of their stock of international
reserves.






claims on a key currency con increase only if the kay

currency country's balance of payments is in deficit. A

deficit in the balance of payronts of a key currency country

causes that country's net reserve position to deteriore. t

Thus, as a key currency or centre country provides

additional international reserves to other countries in the

form of clir-s on its currency through deficit: in its

balance of payments, the claims on the currency of the

centre country become0 Inss acc ptahl n as intern tloorrl

reserves by virtuj' or th neccessary dintrioration in the

key currency country's net Iss;:rv position. This dilmii

is inescapable under the present intirtionarl mcns-tary

system.

The problor in conplicatcd under th present system

by the existence of more than one key currency country and

the fact that international reserves are also hold in the

form of goild.. The prices of the key currencier in terms of

gold and in terms of each other are, in general, stabilized

within narro.j limits by thi monetary authorities.5 But the

official prices o:' exchange rates do n t alr-ys conform

to uhi t the exchange ratLs aould be in the .bscnce of

governm-nt intervention in the exchange markets. Inde d,

such conformity could not be expected. Consequently,

monetary authorities h'ive, from time to time, been forced


5The price nf non-m:ioretiry gold has not, of course,
been stabilized sineo iiy 17, 1968. Seee Tine W kly Bord
BlijLr, CLXXI, No, 3911, 10.







to revalue official exchange rates to conform more closely

with the rate. which a free market would dictate.

One of the main problems which arises from such a

system is that of speculative instability. As the

"overhang" of convertible claims on a key currency increases

relative to the key currency country's stock of international

reserves, fears that key currency will have to be

devalued tend to increase. Such fears bring pressure on

central bankers holding claims on this currency to convert

these claims into other forms of international resorvrs.

Such conversion further rmeakens confidence in the value of

the key currency and increases the possibility that

devaluation will be required. Furthermore, private

speculation tends to occur against a currency which is under

pressure. When continuing deficits in a key currency

Country's balance of payments lead private investors to

speculate about the possibility of that country devaluing

or imposing direct controls on exchange transactions, the

private investors may try to convert their claims on the

key currency before such measures are taken. Such action

". can quickly generate a speculative 'run'" Which 'ill

tend to reduce the reserves of the key currency counLry,

. . thereby strengthening the fears of devaluation and

leading to a self-gonorating incrcrase in the rate of d.,cline

in its reserves."6


6jrrrinn L. Smith, "StaL n rront," in Guidelinus for
Intent ationI 1 Nooncrtiry R'forrl,, Hr ringS bcf ore th- ub-
c mitoe a'i'nltnrn:ii;Tnol Exchlngn iid Payrments of the







Such occurrences are always possible as long as

there is more than one form of international reserves. The

possibility of speculative shifts from one key currency to

another or to gold leaves open the possibility of a violent

contraction of the rorld's stock of international reserves

and the possibility of a severe disruption of world trade.

Even if such a calamity is avoided, the very possibility

that it might occur could, end vury likely does, restrict

growth in the production of real goods and services

especially in the key currency countries even though the

foregone output is, of course, not obvious and extremely

difficult to quantify. Such restrictions in the growth of

real production can result when the formulation of econoeiic

policy becomes so strongly influenced by balance-of-payments

considerations that the policy becomes more restrictive then

is necessary to keep the rate of domestic inflation to a

level which is internally acceptable.


A Possible Solution

Awareness of the inherent problems of the present

international monetary system has, of course, existed for

some time and numerous solutions have been offered.

Professor Machlup has, in his taxonomical manner, grouped

the various plans in the following way:


Joint Economic Committee, 89th Cong., 1st Sess., Part 1,
July 27, 28, and 29, 1965, p. 62.








"A. Extension of th:. gold-o.ichange standard

1. with continuing increase of dollar and
sterling reservos;
2. uith adoption of additional ksey-curroncies.

B. Mutual assistance among central banks

1. vjiLn safeguards against expansive
credit and fiscal policy;
2. with extension of domestic credit
and expenditures.

C. Centraliza ion of monetary reserves and
reserve creation

1. wiith overdraft facilities available
to deficit countries;
2. ijith autonomorus reserve creation by
the world central bnk;
3. with finance of aid to undordrveloped
countries.

D. Increase in the price of gold

1. nith the goldi-exchange standard
continued;
2. with the gold-oxc nge standard
abalishod.

C. Freely flexible exchange rates

1. in order to male internal monetary
policies morn independent;
2. because internal roneury policies
are too Jndni ondent."

Writing has been so prolific in this area th*t it is

a simple task to find several slightly different plans

Pwhich would fit under each of flachlup's subcatsgorie..

Since this paper is primarily concerned with a quec.tion

rhich is related only to those plans which would create a

no'v type of reserve asset and because mount of those plans


7Fritz M ichlup, Pl3n:; for Reform of the Internatio, 1
iMonitiry SyF-t ("Spoci aliaplr- .. *i ... b in;,'
No. '; P inc tuc on: Princeton Urivcrsity fr. Augu.t, 1962),
p. 12.






have already been vell publicized, it does not seen

necessary to discuss each type of plan here. Even the


8The following are references to the types of plans
referred to in I[achlup's classification. The letter and
number headings given here correspond to tl'os, used in
rachlup's outline.
A. 1. Charles P. Kindllbo-rger, "Statr ment," in
Balance. of Payr nts--1 965, Hearings Iei-fore a Subcc;-i tt
of the Cu oi t e on B king end Currency, B9th Cong.,
1st Sess., Port 1, 1955, pp. 30.- 3.
A. 2. Friedric A. Lutz i.tcr-
national Liquidity nd th tjlti; 1 :
t"Essays 1i inLna tio Iin .
Princeton University PrEss, I]r th, 1963).
B. 1. Per Jacobsson, "Presentation of the
Sixteenth Arnnul Report," r ediis of the

S ..... 1961)
pp. 27-32.
B. 2. Cdward M. Bernctpnn, "The Proble, of
International i monetary ResPrv r-, Intr'

F .. _. i io Subi .,, 'ttLc on
S.. . . . point F conre in
Conrlitte 07th Cong., 1st Sues., Iay, 1961, pp. 107--37.
C. 1. Great Britain, P;rliane n tFPl.ir]s,
Cmd. 6437, April, 1943.
C. 2. Triffin, Gold t hri Drol.-1 Cr is ,
pp. 102-20.
C. 3. MIiaxevll Stamp, "The FnOd and the Future,''
Ljoyads Bank RteiL,, KIer Series No. 50 (October, 195b),
pp. 1-2U.
D. 1. Harrod, Internationpl llon etary Fund Staff
Pap ers, III, 1-AS.
D. 2. Jacques Rueff and Fred Hirsch, Thi Roil. and
'.F : !: .:r ?..1 .'. .i-, .,-, -, '. ("Essays in int Li iEt .. .
i i i .. -. Princeto n University PresS,
June, 1965).
E. 1. Jaronlav Vanek, "Ovarvaluuotio,-i ni' the
Dollar: Causes, Effects, and Remedirs," Factors Affecting
the United States Balance of Payments, .Joint 'Eoiu sic
.: -', ..,. 1962, pp. 267-25.
E. 2. George N. Halm, "Fixed ur Flexible Exchange
Rates F :' i : F ,- : t" li.;:.-. .. -- .
Paymn nts, .. L.:,:.' : L: ... .. . ... -
S- ,. 253-66.
Also see Robert C. Ha xkins and Sidney E. Rolfe,
"A Critical Survey of Plans for Intrnaertional r ontary
Reform," The bulletin. No, 36 (Noverber, 1965) for a
critical ev-,luatio of the different types of proposals.







restriction to this one type of plan for reform is not in

itself very limiting because numerous proposals for

creating a ne'j international reserve asset have been

presented in recent years alone. Among the more publicized

of these proposals ere the so-called Triffin, Stamp,10

Paudling,11 Day,2 and Angell13 plans. jhij le tle

differ-nnces ba,.twen thess plans hi:ve been er;phasized and

possibly exaggerated by soiLe writers, thy are essentially

the sane in their most impo-tant aspect Indeed they

are not fundamentally different from John Paynard Keyncs'

proposal for the establishmorlt cf an international clearing

union. Each plan provides for, in sono fashion, the

establishment of a supranational institution here at least

some portion of the world's int ltriational rescrvSs woild be

centralized. 'urthermorc, each of these s plans proposes

that this institution rjould credit a ner; fori of reserve

asset to either supp]ienint or supplant gold and hey

currencies as international reserves.


9Triffin, Gold and the Dollar Crisis, pp. 102-20.

1Stamp, pp. 1-20.
1Reginald 1,laudling, "StateiEnrt," in Sur,.; ary
-. ,:. .! ,-..,- .- ,-, ",,.-,, 1 etj in q f tl 9oard
: .. -.....' honetaory fund,
-, I''" ), pp. 61-66.
12Grcat Britain, Perli..mcntary P.oi r3, Cnd,. 827,
1959, pp. 241, 247-48.
13'Jams I!., Angel "The Rour gani7zilion of the
Intarnritionzil cNrnetary Systerr: An Altf-;'rntive Proposal,"
The Econ- .i._c Jcuirnal, LXXI (DRcc bor, 1961), 691-708.







Rather than describe each of these planii in detail,

it would seem more useful to note so m of the moe imr portnt

aspects of the rore rcc nt proposal to establish a "Special

Drawing Account" within the International Mconetry Fund.

This plan is fundamentally the sane as the other plans to

create new reserve assets and it is currently being

seriously considered for eadption.14

A general outline cf this plan has elr'-dy be'n

agreed upon by the Fxecutive Directors of the Inte'rnationi.

Monetary Fund and ths Central Bank Governors of the Grcup

of Ten. The outline 'as approved by the Board of Governors

of the I.f.F. at their ls t annual mating held at Rio de

Janeiro in S.pttrebcr, 196C. The Boerd of Goverrios then

requested that the Executive Directors drai up tiLrnrndent:

to the Fund's Articles of Agree' Esnt srhich tmould incorporate

the Special Draiing Account into the present Fund otcructura.

This was done and Itas presented to the [6'isritrs and Ccnitia

Bank Governors of the ten countries vhich participate in

the General Agreement to Borrou at their meeting in

Stockholm on March 29, 1968. The participants, 'aith ths

exception of France, agreed on the proposed amnendmnnts to

establish the Special Draoing Account provided some

relatively minor changes mcre made. It uis dirnet-d that a

final draft of the amendment be comppleted nhich would be


14U.S., Co, grct., Nf '" P.l rOT .- r' ...
"-. .' "ring .
',..:*- i- ", , and Payncnts of the Joint Ecnnonic
Committee, 90th Cong., 1st ens,, Part 1, Seppt.siber 14, 1967,
pp. 3-6.







transmitted to the Goard of Governors for their finL)

approval.5 The Governors cill vote by [ay 31, lg9B Liti; a

simple majority of the weighted voter needed for fora-

adoption. If such a majority is forthcoming, the proposed

amendment uill become effective after it has been voted

acceptable by member nations holding at least 30 percent of

the total I.lf.F. voting poilor. When remember nations tith at

least 75 percent of the tLotAl Fund quotes hlve formally

declared that they sill underLake all of the obligations

required of a participant in the noe facility, thcn the

Special Drawcing Account will con into legal existence. The

Special Dra ing Account. till be activated en the decision of

the managing Director of the Fund which ijuet be concur red

with by the Executive Directors and approved by an affir-

mative vote of the Board of Governors mhich totals at lenst

85 percent of the total I.M.F. voting ponor.1

The proposal to provide special drawing right.

through the establishment of a Special Drawing Account


15Intern'itional IMonetary Fund, "International
Monetary System," Tn-r'n-+ i ?n-1 ri ---r'1 l n'rrr ni XX,
No. 13 (April, 196; ,, 1 i" '" in Its
Latest Bout," Blusin-ss LJeck, No. 2014 (April 6, 1968),
pp. 47-49 and Fir.st: Nati'onal City Bank o: New York, "'NWu
Perspectives on Gold," lMonthly Economic Letter, April, 196,`,
pp. 39-/2.
SPierre-Paul Schweitzat, "Proposod Arnndment nf
Fund's Articles of Agreement," Intern-.tional Financi:il
S...c. ~ yvy, XX, No. 17 (May, 1'ob 153/3-). It should be
i... lit the United Steatu hIolds 21.9 percent of the
Fund's voting po i.r while the mr.eo')urrs cf the Etulopean
Economic Conrmiunity (E.E.C.) together hold 16.5 percent of
the voting pourer. Thereffor, eitho; the U. S or all mrombors
of the C.E.C. voting toocnth;r could prevent the Special
Dr-uwing Account from bling activated.







within the I.M.F. is basically a noncontributory schema for

supplementing tho existing supply of international reserve

assets. The proposed amondcnt' to the Articles of Agreenant

would divide the Fund's operations into two part;.i Thore

would be the General Account through uhich the transactions

which the Fund now carries out rould he continued, The

innovation rould coiio in thi forl of the stablishnant of

a Special Dratwing Account through Ihich transactions

involving the new special drawing rights would take place.

When the I'anaging Director and the Executive DirrEcors of

the Fund decide that international conditions are such that

the Special Drawing Account should be activated, the [iann-ing

Director will propose that a certain amount of draining

rights be allocated over a given period of time at a certain

rate. This process shall begin follo)iiing a vote of approval

by at least 85 percent of the voting power of the Board of

Governors, The participating countries would receive, on a

noncontributory basis, their allocations of the approved

drawing rights in the form of credits to their accounts in

the Special Draning Account. Each country would receive

that percentage of the total drawing rights allocation

which is equal to the percentage which its regular Fund

quota comprises of the Fund's total quotas. It should be

pointed cut here that under the proposal currently being

considered, every member of the Fund would be allowed to

receive a portion of the special drawing rights in proportion

to its regular Fund quota.







The member countries will be allowed to use their

special drzhing rights unconditionally, and the rights are

to he accepted by all participating countries on a par

tith other forms of international reserrves such as gold or

claims on the dollar.

When a country wishes to use so ., port of its

allocation of special d.rating rights to ciamt an interr.ational

obligation, it will First notify the Fund of this desire.

The Fund will accordingly direct this draining to a country

(or countries) vjhose balance-of-payments and reserve

positions are considered satisfactory by th" Fund. The Fund

mill then notify the country draun upon that it has been

credited a certain amount of drawing rights in the Fund's

account. The country drain upon must giJve a credit in

terms or its oq'n currency in its central bank accounts to th.

drawing country. The country druown upon will thus end up

with an increased amount of special drawing rights. The

drawing country will lose the same amount of special drawing

rights but s'ill gain an equal claim on the domestic cur'.ency

of another country.

Perhaps o-n example is in crdor her'f. Lrt us assuoe

that it is decided to allocate a total of 5 billion in

spuciul drawling rights at the rzite of $1 billion a yrar.

Assure the U.S. quota is equal to 20 percEnt of the Fund's

total quotas. In this case the U.S. rould bs allocated

i70D million in ,,pcial dra wing rights in the first yra'r.

Lret iu; furth -oir a;suoe that the U.S. runs a b'lanne-of-po- ym'nts







deficit in the same year and wishes to make use of

$100 million of its special drawing rights. It would first

notify the Fund. The Fund would direct these drawings to

countries with strong reserve positions. Let us say the

Fund decides to direct the drawing equally toward Sweden

and Belgium. The Fund would notify each of these countries

that their special drawing accounts had been increased by

t50 million and that they should credit the United States

with S50 million of kronor and francs respectively in their

central bank accounts. The United States would thus have

exchanged 3100 million of special drawing rights for claims

on kronor and francs worth S100 million which it could use

without restriction. It might be noted that under the

present proposal the drawing country would pay a moderate

rate of interest on the drawings while the countries drawn

upon would receive the same rate.

A participating member is required to reconstitute

its position in the Special Drawing Account if its average

net use of the rights calculated on the basis of the

preceding five years exceeds more than 70 percent of the

drawing rights allocated it by the Fund. Otherwise, a

country has no reconstitution obligation. On the other

hand, a participating country which finds itself with a

surplus in its balance of payments or a strong reserve

position is obligated to accept drawing rights up to an

amount which is twice as large as its own allocation of the

special drawing rights. Such countries will, of course, be








allowed to hold larger amounts if they docile. It should

perhaps be pointed out that the dreaRwing rights mould also

have a gold volue guarantee similar to that expressed in
17
art. IV, sec. 8 of the Fund's present Articles of Agreenent.

The plan to create special drawing rights, or a

plan similar to it, could help prevent any future shortage

of international reserves if the r'orld's central bankers

and monetary authorities are willing to treat the special

drawing rights (or bancors, X.I.M.F. units, etc.) as part of

their international reserves. If' such willingness on the

part of monetary authorities does come .into being, then by

definition the creation of the special drawing rights nill

add to the Iorld's stock of international reserves.

17,(a) The gold value of the Fund's assets shall
be r.maintained notwithstanding changes in the per or foreign
exchange value of the currency of any member.
(b) Whenever (1) the foreign exchange vplue
of a nm'rber's currency has, ir, the opinion of the Fund,
dcpreciated to a significant extent within that ieimber's
territories, thne nomnbr shall pay to the Fund within a
reasonable tine rn amount of its oun currency equal to the
reduction in the go]d value" of its currency held by the
Fund." U.S., Drpartment of State, International Origani-
zation and Conference Series 55i Unitnd .Ntions oennetary
and Financial Conference, Lr to f,.j Hai. hJre,
Juy"'1 to Jul 22, 194'4', F n&J." Act enJ .. .
Dep 'rtei nt o' St zta Pubication No. 21 ., ., j, U,
1944, p. 31.
For a more detailed discussion' of the plan to
establish a system of speciall drawing rights" sne U.S.,
Congress, r lan for Intornt..tional -.. i .
Hearing ..--1,. the 'ubco m i i tte on Internro tion I '
and Payments of thn Joint Ecou;imic Committio, 90th Cong.,
Ist Scss., Part 1, Septermblur 14, 1967 and Port 2,
November 22, 1967, cit-d hlcreficr as U.S., Congress, New
Plan fr Interinational 1nc:r' ty Rtservrs; Schaueitzcr,
pp.~1'7-.9';" andid Forat or_ S udy1 Gru on the Crention
of Re:.rp Ar, rt!, t ay"y 'i, 1' .







It is, of course, difficult to predict if central

banks ill consider, iiid continu- to consider, the special

drawing rights to be on a per with the other forms of

international rserrves vjhich jould continue to exist under

the proposed trrangemnt. If any given count of special

drawing rights becomes L s acceptahle in th min-Lds of

central bankers than en amount of colr, or koy curre-ncies

defined by intc'rntion 1 egrcccnt to be cqurl in velue to

that acm'i'nt of drEiin ng riDrhts, thrn tih cenrtr l bir,,ikrs

might try to diw t th .mslv a's oC the dr.cing liohts and

replace th .;' iith gold cr lkey cu rrnci Recent

exprrienc.Es rJith spu~culative flights from key currrincy to

key cu;: rriy rnd to gold should be sufficiic.it reminders th;:It

a neo ly crc *tcd form of rcscrve asset might also be subject

to similE.r cIov-n.~rnts. The possibility of such speckultiv,

flights uould be increased by the coexistence of Esvcral

othcr forms of reserve assets.

It is postulat d that if the special drafting rights

become and remain fully acceptable on a par basis wvitih cthhr

forms of international reserves and if their rate of

allocation is not excessive, then their creation will,

ceteris paribuc, lnad to the achievement of a nore offici rtL

international monetary system. On the ather ha 'd, if their

acceptability declines relative to that of other reserve

assets; or if thcir rate of allocation is excessive, it is

further poctulati d that, cetnris pnribur, the internitionl

monetary ntystem r'ould be ro:re eff icien.t cithou their








creation. These statements, of course, cell for a definition

of efficiency in regard to the uorld monetary system. At a

relatively high level of abstraction je can define en

efficient intcinational e monetary system as one which

facilitates international trade and transaction so that

production within countries can be specialized in accord

with comparative advantages. As vie I1ctor the level of

abstraction the definitional probloEm bpcomris morc difficult,

However, it rould seei that rny modification of ths inter-

nationel nonrtLary system cjhich eould lessen the n'rd or

desire for international trade or excharige restrictions,

and/or reduce disequilibrcting flous of capital, end/or

rtducc inflationary or deflationary pressures on world prices

would improve the efficiency of the torld mniretary syctt;,a.


A Question Which ilmust be Dealt With

This dircunsion brings us to the more specific

question rith ijhich this paper is prima:rily concerned. lih'

is, assuming it is decided that additional international

reserve assets should be created, oould the direct allocation

of soule portion of thcro reserve ;isect to undLrdevcre). ped

countries help achieve a more officirnt intcrn.tion-l

monetary system.18 The answer to this question dc!;ptnrid cn

what the underdeveloped country(, iaiould do nith cny nrcly


8I1t should perrhLap be pointed out aguii thFt the
plan curre nltly b-engq conoii .,red hy th Y.Nf.F. doec not
propose thth the total a;,uunL of any n vly rc, ted reserve
assets bo directly Cllo c-.td to tlir unricr)r;ovolop, couhtrios
(nor do most of the pl.ris .urr: -ntly hr'ing offeoi ').







created international reserve assets rHich right be directly

allocated to them.

The following analysis of this- question will be

couched in terrs cf "S.D.R.'s" (special drafting rights)

rather than the curibers ome term "nuly created ir.tprnational

reserve assets." The term "S.D.R." is used in thin

discussion as bciing gner ally repin intative of any nor

fiduci a'y in;struincnt1s tihich are purpc cly crcratEtr by mrtns

of international agrccanr.t to function es international

reserve assets.

The analysis it Iaf uill consic r the t ro basic use

alternatives betr'Ac;o rj;ich the iinr:td dCovlpcid countries

could choose. First, they could use the S.D.R.'s to add to

their stocks of irite national -rseIrve to hb. Used for hFeting

terporury deficits in their balpnces of pay;enitr,. This type

of behavior will be discussed aE te its rost prob.bl.t effects

on (1) restrictions placed on international trade and

exchange transactions' (2) disequilibrating ecpitl ;.ov errints,

and (3) inflationary or deflationary pressures on national

price levels. Second, the underdeveloped countries could

use the S.D.R.'s to directly transfer real resources from

the more developed countries to tlhemsplves. This type of

behavior will also be discussed as to its most likely

effect on (1) restrictions placed on international trade and

exchange transactions, (2) disequilibrating capital move-

ments, and (3) inflationary cr deflationary pressures on

national price levels.








Behavior i which uno ld I ead to p more efHfic.:t :iot etii1
mon a)y yc

It i- possible that the iunderrlvelopud coucitrir..

should use their allocations of S.D.R.'s to add to i!i'ir

stocks of international reserves to be usd for s- tirng

temporary deficits in their balances of pryrn'lrsk and ouoli

reconstitute any of their losses over time. In thisE case,

the direct allocation of S.D.R.'s to the underdevloelpbd

countries Would, cotoris paribus, result in a urr-, fcficio:nt

international rmonetary system.

Trade. and exchange restrictions. ~If the un~cCr'-

developed countries ncre to use their direct allouitions of

S.D.R.'s to odd to their stocks of international re~ rvrs

then, ceteris poribus, those countries i.culd find it LsDic'

to remove exi stiny or refrain from imposing additinerl

artifi. el irpedimennts to international trade (i.e.,

tariffs, Cquita restrictions exchange controls, prelhibitiorns,

protective int:-rnal excise taxes, liconscv', etc.). The

additional nose nith which underdeveloped countries ,iculd he

able to lihorelize their international trvde policies as a

result of on increase in their international roserve., .xtoc

directly from the prine function of such rerucrvcs. Their

prime function is, as wias !o s;ill put by Ragnar Nurkso

". . to serve as a buffer giving each country so 01 ee1 I iy

for the regulation of its national income and cmploymsent and

providing it with i runs to soften the im pmct of eco'nornil.







fluctuations rising outside its bordcrs."19 For exi;l; ,

assume that a decline in the demand for an undrrduvcloped

country's exports results in a deficit in its balance of

payments. Other things remtinino equcl, the sequence of

events in the und rdievlopcJ country wouldd be: a decline

in exports, a decline in income and employment in the

export industries, and a decline in income and leiployrmnt

throughout the economy until cqui ibrium is restored in the

balance of payments. Such an r'ccLrrence ruould, of course,

bo in direct conflict 'ritih the major collcutivo reconorii

target of the underdeveloped countries (i"., th e-lt,-oi:ent

of a minimum nnuol ratE of growth of cggTriat: national

income of 5 percent by 1970).20 Cons~qrent:)y, policy miaers

viould exercise more expansionpry coanoiic policio in an


'lu_ : ..-, p 11 .
It has been suggested that inter ationel r i crves
also can be used for other suhnidiary functions such as
ehen ". , structural changes in the economy *c> necessary
because of poe'iancnt imbalances, the authorities croi use
reserves to help ensure a slicror and more orderly path io
adjustnmnt. .. In many cases, a certain pcrcente'ge of
official ressrveo is hsld to satisfy donostic lug'l reserve
roquirement-s. Also, it in likely that some reserves are
held to maintain confidence broad ad n so'me for pur ly
conventional reasons.' United UHations, Sscret'ary-GCnerou),
"The Adequacy of Reserves of Developing Countries in tih
PosCtmar Period: Note by the Secretary-Gen ral of UNMCTAD,"
Dec, TD/8/3i, Novomber 10, 1965, contained in Annrc!nes of the
c r::.",. :-I "-,.-- !: ,2 | i- ; ; .. ,, r.- ",co en"l: : :l.. r
S1 . 7 ,
. .,, ., ,. , , ), p 25.

20United Nations, Coneral Assemlhy Resolution 1710,
16th Sess., I, Supplement No. 17, par. 1, Scptenber 19,
1961-Frbruary 23, 1962 (Ne' York, 1962), 17. Also see
Sidney Weintraub, T:-.. F '.-.-, r r -, .. ,, ,,
Countries ("Essays J .... "
Princo;on: Princeton University pss, Sptemr, 1965)








attempt to offset tho depressive balLncn-of-paycmnts

influences and achieve the desired level of expenditure,

income, employmrrit, and groaith. Such policies might help

achieve the domestic economic goals, but could not be

expected to help reduce the balance-of-payments deficit. If

the deficit country held an adequate amount of international

reserves, it could use them to meet the obligations arising

from its balance-of-payronts deficit. On the other hand, if

the deficit country did not have adequate international

reserves to neet such obligations and refused to enforce

more restrictive economic policies because of goal

priorities, it uould be forced to seek adjustment either

by moans of exchange depieciteion or trade and exchange

restrictions.

Since this analysis is being carried out within the

basic framework of the present international monetary system,

frequent exchange depreciation as an adjustment to balance-

of--payments deficits will not be considered, Other than

more restrictive economic policies, this leaves exchange

and trade restrictions as an alternative response. It

therefore seems that if underdeveloped countries had larger

as opposed to smaller stocks cf international reserves, they

would, cnteris perihus, find the removal of existing artifi-

cial impediments or the avoidance of imposing additional

impediments to international transactions easier to achieve.21


21It can furthfnrmore be argued that und rdevelopad
countries Ectur.lly need a rtlativc.iy lar gir stock of intor-
notion1a reserves to meet teiiporary baltnce-of-p ymri'cts







Disequilibratjingq capi tal movomnts.--If the under-

developEd countries use the S.D.R.'s to build up their

stocks of international reserves and reconstitute their

losses of S.D.R.'s in a manner ahich reflects the rate of

growth in their international transactions, then, in itself,

the direct allocation of S.D.R.'s to the underdeveloped

countries would not lessen confidence in these assets

themselves anymore than would the direct allocation of

S.D.R.'s to the developed countries. Assume that the

underdeveloped countries do behave toward their S.D.R.'s in

this manner, As a result, other countries would realize,

or come to realize, that uhen they exchange real goods and

services for the S.D.R.'s formoriy held by the underdeveloped

countries, these S.D.R.'s reprEsent claims on the real goods


deficits than do the developed countries. For examplc, the
Group of Experts on International Monetary Issues est'b--
lishcd by the United Notions Conference on Trade ind
Development argued that "The liquidity requirements of
developing countries are greater relatively to their imports
than those of the developed countries. Prices of prinary
commodities exported by developing countries tend to be
subject to far wider short-term disturbances than the prices
of manufactures exported by developed countries. This,
together nith the greater susceptibility of agricultural
products to fluctuations in volume, make the developing
countries particularly vulnerable to destabilizing influences
of a short-term character." United Nations, Conference on
Trade and Development, International Moanetary Issues and the
un'ti. s, R,.. ... , o
International Ik notary Issues (TD/B/32; TD/B/C.3/6)
(New York, 1965), p. 9. Other such arguments center around
the growth goals of the underdeveloped countries and the
likelihood that efforts to achieve these goals will induce
a "foreign exchange gap" requiring additional reserves for
the underdeveloped countries. Poul H/st-fIadaen, "Balance
of Payments Problems of Developing Countries," The Fund
',L "* ,' F": ' - -, nt, IV, No. 2
S iI ,. ... .. eub, oassism







and services of other countries whichh can be obtained

withinn the multilateral system. In fact, if the under-

developed countries are to reconstitute the reserves which

they lose, they must do so by achieving balance-of-

payments surpluses. These surpluses, ignoring foreign

grants, aid, loans, investments, etc., must be the result

of offering desired goods and services to other countries

on a competitive basis. If the S.D.R.'s temporarily

transferred to other countries by the underdeveloped

countries represent claims on such goods and services, there

seems to be no reason thy their relative scarcity End value

would d be advercely affected by their direct allocation to

the underdavsloped countries. If those conditions of

behavior are met, it Jould seem reasonable to conclude that

the direct allocation of S.D.R.'s to the underdeveloped

countries would not tend to lecssn confidence in the nf,;

assets or tend to set off speculative riovements auay from

the S.D.R.'s.

Inflationary and deflationary forces.--It is, of

course, realized that a too rapid allocation of S.D.R.'s

on a worldwide basis could tend to be inflationary. On the

other hand, if gold and foreign exchange cannot meet future

needs for international reserves, an expansion of ihe

S.D.R.'s which is too slnu would tend to be deflationary.

Fortunately this analysis need not be concerned with

establishing a correctt rats" of creation for the S.D.R.'s.

On this particular point it can be assumud that they jill






be created at an overall rate which would be neither

deflationary nor inflationary in itself. Then the more

limited question can be raised of whether or not the direct

allocation of some portion of the S.D.R.'s to the under-

developed countries would result in deflationary or

inflationary forces. The historical performance of the

underdeveloped countries very strongly indicates that their

attainment of additional reserves is highly unlikely to set

off any deflationary forces.22 The same is not, of course,

necessarily true in regard to inflation. Nevertheless, the

answer to this particular question would seem to turn on

the use made of the additional reserves by the underdeveloped

countries.

The underdeveloped countries could add the S.D.R.'s

to their stocks of international reserves and fully

reconstitute any reserve losses over time. In order to do

this, other things remaining equal, they would have to keep

the rate of increase in their domestic price levels, as

seen through the foreign exchange rates, in a general

equality with the domestic price levels of their trading

partners. If this condition were to be met, then a

proportionate allocation of some given amount of S.D.R.'s

to the underdeveloped countries would not, in itself,

result in additional inflationary pressures.


22However, there is one special case in which the
direct allocation of S.D.R.'s to the underdeveloped
countries could have a deflationary effect on the domestic
economies of the underdeveloped countries. For a brief
discussion of this case see pages 85-86.






Behavior i!hich l'Jculd ).Ind to a .les efficient international


On thle Icos favorable side, it is possible that

the underdeveloped countries I'ould quickly draLi down and

fail to reconstitute any S.D.R.'s which might be allocated

to them. In this caso, the direct allocation of S.D.f.'s

to the underdeveloped countries would, ceteris paribus,

result in a less efficient international morietary system.

Trad e.d a exchainge. restrictions.--Suppose the

underdcvAlopo countries decide that holding the S.D.R.'s

to meet temporary balance-of-paymcnts deficits represents

an opportunity cost in torms of foreign goods and services

which they are unwilling to accept. Such an attitude is

certainly not inconceivable givnn the relative real incomes

anJ the oxtronaely intense desires for improved standards of

living uhich prevail in those countries, The S.D.R.'s

could be draon down directly as a result of increased

government expenditures abroad. Alternatively the S.D.R.

loss night come about indirectly as a result of more

expansionary monetary and fiscal policies. The means is

not of major irmportrnce on this point. Either cay, if the

underdeveloped countries continuously droc douin their

S.D.R.'s *rhil: the developed counttieor accuulated ever

larger s'toc'; of thetso assets, the result would be a net

transfer of real goods arid services from the developed

countries to the undc:rdveloprir countries. Such a transfer

might be desirhble on othu)r grounds, but if it uuro to take

place' by the. mc:ans, it inould do nothing to improve 'or]d






would most probably deter the achi vmeont of a ,are Efici .t

international monetary system.

The underdeveloped countries vjould, by attaining the

additional goods and services in this manner, raise thnir

levels of real income. Hosiever, the recsrves held by thosi

countries uiould then be, other things reoiaining equal, b ac

to their original levels (io., the louuls which oexsted

before the S.D,R.'s w ire allocatc-d). Such a situation

could lced to additional trad: and exchange res'ricti.ons

from two directions. First, larger absolute, though not

necessarily rolctive, fluctuations in their pyoyr.int;

balances mould )ikely be associated uith thl lErg :r real

incomes. Second, the higher levels of reo'l ince'i -ay

become accepted as the norm, and a reduction in i=iinsfe frost

the highr level for balance-of-payents purposes may

prove to be juv t as difficult to achieve as an equal

reduction from lo',or levels. 2 In vicer of th"iso foircs it

is quite likely that the pressures on thi balarnl se of

payments will remain strong. Consequently, the pressuros

for trade end exchange restrictions might aoll res'ain as

strong, if not stronger, after the transfer of real goods

and services by means of the S.D.R.'s has been achieved as

they were before the transfer.


23See J. S. Duesenberry, T ? ..... .- I.:'
Theory of _Cons.um-er Behavior (Camb':', ,j : ., 1.-.. r .ty
Fr ..:, i ,I; -.::. ,:. ,, ', "Fluctuations in the
Savings-Income Ratio: A Problem in Economic Forecasting,"
Studies in Inco i a ndi Wealt, XI (Now York: National
BureLau of Economic Research, 1949), 371-441.








There is, of course, always the possibility that the

underdeveloped countries might devote the goods and services

acquired by means of the S.D.R.'s into real investment

which could be directed at increasing exports and export

earnings. However, there is nothing about the direct

allocation of S.D.R.'s to these countries which would in

itself bring about the needed increase in their peoples'

propensities to save.2

It therefore seems likely that the direct allocation

of newly created reserve assets to the underdeveloped

countries would do little if anything to reduce the resort

to exchange and trade restrictions by the underdeveloped

countries if they allow such allocations to be quickly used

and fail to reconstitute them. Furthermore, it is

conceivable that the developed countries would, upon

recognizing the unintended flow of their real goods and

services to the underdeveloped countries, react in a

restrictive fashion.

Disequilibrating capital movements.--One of the

more serious possible consequences of this type of behavior

toward the S.D.R.'s is the possibility that uncertainty may

arise in the minds of central bankers or even private

speculators over the ability of the S.D.R.'s value to be

maintained vis-a-vis gold, the dollar, etc. If this

uncertainty is allowed to exist, it may ultimately manifest


245ee Ragnar Nurkse, Problems of Capital Formation
in Underdeveloped Countries (New York: Oxford University
Press, 1953), pp. 89-97.







itself by oeans of speculative shifts front the S.D.R.'s

to gold or key currencies. Shifts out of the S.D.R.'s to

other forms of international reserves would tund to loter

the relative value of the S.D.R.'s and justify the

speculative shifts. Such r:ovenents could become cumulative

and result in & severe disruption of the international

monetary systEr and world trad .

A lack of confidence in the S.D.R.'s could result

from the undrdedveloped countries continually using there

assets to drae real goods end Fervices frnli the r ore

developed countries. It r ust bo keipt ji rid d that thil

creation of the S.D.R.'s Itould be a continuing rlth er than

a one step process. The continuing i Location would

supposedly be dictated by the continuing groutth in inter-

national transactions. This m8si-is that the unrdedevelcprd

countries would have a continuing inflow of S.D.R.'s which

they could attempt to exchange for the gonds and services

of other countries. Furthermore, under the pLien to croeto

special drawing rights, tjhich is presently bning considered

by enbrers of the I.M.F., a country can continually usS

70 percent of its S.D.R.'s without facing cny reconstitution

requirement. The reconstitution provisions are mPde even

more liberal by averaging net drawings over a 5-year period

for purposes of deciding whether or not tho 70 percent

limit has been exceeded.

If the underdeveloped countries try to use these

terms to their oin short-run advantrCo by continually drawing








down and failing to reconstitute their allocations of

S.D.R.'s, all of these assets will tend to end up with the

monetary authorities of the more developed countries. Under

such conditions the developed countries would probably find

their accumulated S.D.R.'s to be of little use in drawing

against the underdeveloped countries for two reasons.

First, if the I.M.F. should direct drawings to the under-

developed countries, it would be in the illogical, if not

impossible, position of directing drawings against countries

in deficit or weak reserve positions. Second, even if the

drawings are directed against the underdeveloped countries,

the currencies which the underdeveloped countries would

provide are likely to be less acceptable than gold or

currencies of the more developed countries. The scheme

provides that the countries drawn against must provide

currencies to the drawing country which are "convertible
25
in fact."25 The most probable meaning of a convertible

currency in this sense is a currency which can be freely

exchanged at a given rate into another currency which is

convertible into gold. Regardless of how convertible the

currencies of the underdeveloped countries may presently

be, if they were placed in the world market to reabsorb

large backlogs of S.D.R.'s, their exchange rates would

undoubtedly fall. It is likely that the fall in rates would

be accompanied by speculation prompted by expectations of

25U.., Congress, New Plan for International
Monetary Reserves, Part 1, p. 4.







further declines and attempts to rove out of thp special

drawing rights. The intensity of the speculation :ruld

probably vary directly r .th the amount of S.D.R.'s i:hicl.

the developed countries had previously ecciieuisiat d from the

undordevoloprd countries.

Of course the developed countries could usE the

S.D.R.'s to sLttle obligations enong th cii ves, but over

time thny would be absorbing roorc end rre of thos- dJr~wjing

rights from tho undardovelopcd countries in return fCr

real goods and service, Cne dc uloprd cc'ntry could try

to direct thcr to other dcvElop d country Y, but oll

developLd countries miiqht soon rc-ch the srli position of

having all thl S.D.R.'s which they d sired to hold. IhU

plan no) under consideration by the I.M.F. propou that

no country need obligate itself to hold S.D.R.'s in en

amount over teice its osn allocation. This rmould place a

negotiated lirit on the necessary holdings even though it

would be on expanding limit. Before this limit ucs reached,

however, the developed cnuntrics night bccor reluctant to

continually accept r;hat snountC'd to uncoDloctable

obligations of the undcrdvuelopFd countries on E par viith

gold or claims on the currencies of other developed

countries. If this happened and the S.D.R.'s fall or

threatened to fall to a discount relative to gold, the

dollar, or the pound, etc., speculative moverments a.ny from

the S.D.R.'s icourl probably result. These noverients would

not be likely to occur in the foilr of u direct run on the







I. M.F. Even though tho S.D.R.'s would have a type of

"gold guarantee," the I.M.F. itself tould not be obligated

to convert th;c into gold or key currencies. The undrr-

developed countries jould only be obligated to provide

additionDl rnounts of their oin currencies. Therefore,

most speculative movements would probably result in attempts

of deVeloped countries to place S.D.R.'s with other

developed countries in exchange for gold and key currencies.

The result of such attempts could be a depreciation in the

value of the S.D.R.'s. As was pointed out earlier, a

depreciation in the value of the drawing rights uould, of

course, reduce the value of any crtXntry's stock of inter.-

national reserves if S.D.R.'s composed a part of that

country's reserves. This loss of value would effect any

country holding S.D.R.'s including key currency countries,

In the atmosphere of uncertainty and speculation rhich

sould accompany the depreciation of the S.D.R.'s,

disequilibrating short-terr, capital movnemnts not unlike

the "hot nroney" movements of the 1930's could very easily

be set off,

It is, of course, possible that the developed

countries right receive end hold the maximni,', amount of

special cd-iring rights uhich they had obligated themselves

to without the S.D.R.'s falling to a discount or iny

speculative r.oveornts occurring. Even if this should happen,

the potential problem mould not be eliminated. Over t irne

the raxirum obligations of tlin developed countries rould






increase. The developed countries night then balk at

receiving additional S.D.fi,.' frum the undcrdovcloped

countries.

In the prrliiijiary nugatisting of the dr moing rights

agrecicnt France has continually rrjurcd th t each

participant be giv"n the right to dccio wuhethcr or not it

jill accept any additional llocations ;Iad to it. That

is, it uishps to be entitled to "cpt out" fror: the first
26
or any subsequent alloctionAn. L6 whether or net this right

is explicitly given is not of great significance The

I.M.F., in fact, Ichs the nocsrr ry authority to forcu

countries to accept additional Ellocetions. Thcrefore

any country could, in reality, "opt out" at ctill. The

refusal of any major po ,er to accept the special dirirng

rights ruould almost certainly reduce tihoir international

acceptability and induce speculetiva movorents f'ron the

S.D.R.'s.

Inflatio-ary ond Vdefl) tcn ry crasurrs.---The

possibility that the direct allocation of the S.D.R.'s to

the underdeveloped countries could result in additional

inflationary pressures on world prices is directly related

to the preceding discussion. If the underdeveloped

countries desired to use their allocations of these assets

for the purposes of acquiring real goods and services from

the developed countries, some aechanir m of transfer coould


S, chtr.eitzer, International Financial Nis Survey,
XX, No. 17, 13B.








be required. One simple mechanism wouldd be for ti.t govern-

Cunts of th. undurdovolopcd countries directly to purchase

foreign goods and services with the currencies acquired

from the S.D.R.'s. When those real goods and scrvicc.,

found their L.ay into the domestic economics of the under-

developcd countries, they wro'ild satisfy solme dcmlnnds 'Which

otherwise uculd have had to be net through domes tic

production, foreign grants, or earned imports. Guods obtained

in this frchion riould, cotcris poribus, have a deflationary

effect on the domestic economiss of the underdeveloped

countries.

An alternative rmthod of drawling the goods and

services from the developed countries vould be for the

undcrdcveloped countries to exercise economic policy rhich

tuould allow) domestic demand to expand and, consequcnty,

the domestic demand for imports to increase. The foreign

currency claisis obtairnd froi use of the S.D.R.'s could

then be made available for use by the private sector to

help satisfy its demand for imports. The net effect of such

policy on the domestic economies of the undErdevelopod

countries rculd have to be considered as inflationary.

If the underdeveloped countries mere to continuous y

transfer their drveting rights to the drvel-nped countric:.,

this octlon uould result in a situation uhich iould at

Icast be potentially inflationary for the dccvelopcd

countries in tuLo resp;ects. in the first placEu, thu

addition-l forcjon cxpcnditurts for thi export., of the







developed countries would increase the cffcctive do, rnd in

those countries. Tais rauld be true regardless of hoe the

increased import drmeand care about in the urlcridvno:i.Jupe!d

countries. In the' second pIrce; the additional holdings

of S.D.R.'s by the devClopcd ccuntrirs i tuld tend to he

inflationary just as Eny incrcSit. in their international

reserves could bh, It is, of ccrrsr, quite possible that

the develop'' d countries ,oulc cco 'cisd coniic policy to

maintain the eisiting IivelCs of cfr ltive c. iin 'heir

domestic ccorionir L ov.n thou h lt y 1c' r1 c~v civ gr'c tr -

amounts of int::rj itional reserves an.l iti: dL. d rul thl'i)

exports incrersod. Ncusrth leso thi pri ti;' for

inflation would havc incr as d for tIh dcloprd count:i'r.

Sue vy. --The prccidinr dir-.cur-sion i l idii to eLhei

conclusion tht c if S.O.R.'s eere directly lfloctu a to the

underdeveloped countries and if theI.:: c:;r'tris icrl

hold, use, rind reconstitute thlre asin s ss inter. otional

reccrves, then such tillocations could hilp improve the

efficiency of the international ronotory systin. On thL

other hand, if the undardsveloprd counLrirn meor to utei

their allocations to droui cdoinm real good and services fror.

the developed countrirc and failed to reconstitute th 'ir

allocations, then the direct allocrition of S.D.R.'s to the

underdeveloped countries would, in all likelihood, be

detrimenrital to the efficiency of the international monetary

system. It furthermore seems evident th'it if any plan or

agreement to create a new form of internaLional reserViua is




88


to be successful, a high degree of international cooperation

in matters of economic policy among all participating

countries will be necessary. The more developed countries

have, of course, realized for some time that a high degree

of such cooperation among the major economic powers is

required for any international monetary system to function

efficiently. However, such cooperation among the developed

countries has generally proven difficult to obtain and has

so far been impossible to maintain continuously. The task

will be made all the more difficult if similar cooperation

from the underdeveloped countries with their extremely

ambitious goals of economic growth is also made a

prerequisite to the efficient functioning of the

international monetary system.












CHA T I: A I


THE PRODABLC E HHVIOR iO 'Ui'ilDiDEVL'OCD iUl;;r"'; I
TOWARD DIPECT ALL.OCAT O1- S r: EL I Y CCEA C
INTEIN; ATI,C', L A 'LR .E ASSETS


The preceding chptcr aLtti ptUd to cetallimh th:

relevance of the quiisti.C: 'h't id unicd" ; d

ccr.l!atr'os be likely to do ith ian n,;ly tarcrtd :;:rv,

assets whichh cc diro.tly all "-d to their ? T7,i ri:,

a13ll sttctmpt to ans.ur that fiction;,

Although t'!idly diff ring opinions hvIu ber,n

exprcss:~d cc to the probr.bla bhioL,-nr t th l, uni] -i:u :j

contricis t9axd such rYS rc";, iin oCe7"' t.ia liji Co of

thuight i':'ay ba distinguished: the first bCir t .hat Lth

ui;dcrdvoucEprho- ccuntrie' s cnoul tr e,,i sciuo Pl lo t1, .

incrns a.t.iilJ r serves with vrny icAscs to i'; h ccoCtiliutr

in dun crursp; thlie sc cond birrngt h thU underd:v d opod

countLi s !';oid quickly ius the aelloc'lians to batin F. 1

9ood. anid .rv icus fro:; o;ih : cuitrire n cd fail to

reconbtitut" thLlm.




Tha first line of roaso;ni-,, thotJ.h sni:.'r,:-.

qualified, was cxpr"ssod in a 1965 United Na iti-ons ;,b.lii
se titled Ir!iter f.It -. : ', I-u c .d a h RD ':-f:lr.'ii

CoultLri'i. a repO:t of the GCri' of Exr s o' tc n:'i r. ..i.t








monetary Issues. The conclusions stated in this document

were endorsed by the representatives of underdeveloped

countries and can be thought of as being generally

representative of their position.2 This report pointed out

that while the developing countries have a very great need

for long-term development aid, they also have an acute

need for short-term resources or liquidity which

S. may be expected to rise with the growth in
their economies and external transactions. The
question is whether they would keep additional
reserves if these were given to them. Statistics
of the past are a poor guide for answering this
question, because the post-mar drop in the
developing countries' reserves as a proportion of
their imports does not reflect a uniform tendency
but is the result of the different behaviour
of different countries under very different
circumstances. Some developing countries
accumulated large excess reserves during the
war and were well advised to spend these for
development purposes; others used in this way
excess reserves gained during the Korean war
boom. . Some countries suffered from the
misfortune of export shortfalls before they had
time sufficiently to develop and diversify their
economies; others again have drawn down reserves,

1United Nations (TD/B/32; TD/B/C.3/6) (1965). The
Group of Experts on International Monetary Issues was
convened in accordance with the Final Act of the first
session of the United Nations Conference on Trade and
Development. See United Nations, Proceedings of the United
Nations Conference on Trade and Development, Final Act and
Report C(ECNF.46/141, Vol. I (New York, 1964), p. 53.

2United Nations, Trade and Development Board, United
Nations Conference on Trade and Development, "Continuation
of the Discussion on Item 9 of the Agenda of the First Part
of the First Session (Consideration of the Report of the
Group of Experts on International monetary Issues)
CTD/B/323," Report of the Committee on Invisibles and
Financing Related to Trade on Its Special Session 27
January 4 Februar 1966, Official Records 3d Sess.,
Supplement No. 4 (TD J 57/Rev.1 and TD/B/C.3/18/Rev.1)
(Geneva, 1966), pp. 3-5.




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