Peter Gourley and Patrick Honohan
“We are witnessing and helping to create a profound movement in history,” the President of the United States told the 124 Governors of the Fund at the opening session of their 1972 Annual Meeting in Washington. “We are gathered to create a responsive monetary system,” Mr. Nixon said, “responsive to the need for stability and openness, and responsive to the need of each country to reflect its unique character.”
This mood of optimism, which was to prevail throughout the week-long meeting, was in marked contrast to the atmosphere surrounding the Governors’ deliberations only 12 months earlier. Then, as the Fund Managing Director, Pierre-Paul Schweitzer, said at this year’s meeting, “the financial authorities of many countries were struggling to deal with capital flows of extraordinary magnitude; most exchange rates were floating without guidelines for their regulation or for the reconciliation of conflicting national objectives; and restrictive practices were spreading.”
This year the need to reform the international monetary system received the major share of attention at the Meeting.
Aims of Reform
Focusing on the need for reform, Mr. Ali Wardhana, Governor for Indonesia and Chairman of the Board of Governors, struck a note that was to be echoed throughout the meeting in asserting that an international monetary system was not an end in itself but a means of expanding international trade and of contributing to high levels of employment, real income, and the development process. Mr. George P. Shultz, Governor for the United States, considered that those aims could best be achieved by developing “a common code of conduct to protect and strengthen the fabric of a free and open international economic order.” In effect, a reformed monetary system could not serve, in the words of Mr. Helmut Schmidt, Governor of the bank for Germany, as “a substitute for energetic and responsible policies geared to equilibrium and stability.”
Several speakers, recalling the crises of recent years, felt the system had become increasingly unworkable in the face of changing circumstances. Mr. Kjell-Olof. Feldt, Alternate Governor of the bank for Sweden, speaking on behalf of Denmark, Finland, Iceland, Norway, and Sweden, predicted that the test of any future system would include its contributing to progressively freer international trade in order to secure an optimal international division of labor and to a reduction of the high inflation rate experienced in recent years. Mr. John Turner, Governor of the bank for Canada, felt that, in building on the foundations laid at Bretton Woods, an ideal theoretical system need not be the aim. The will to cooperate was more conducive to the solving of problems than the existence of rigid rules of behavior. Governors for small countries generally expressed a special interest in convertibility and multilateralism, which they considered necessary if they were to take full advantage of modern technology and the division of labor. Governors for developing countries on the whole regarded stability and development as equally important: Mr. Q.K.J. Masire, Governor of the bank for Botswana, stated, “no new system can be regarded as meeting [the less developed countries’] needs unless it incorporates a built-in mechanism ensuring a steadily expanding flow of financial resources to promote their development.”
Reform Proposals Discussed
It was within that context that some speakers from the developing countries recorded their dissatisfaction with the reform proposals which had so far been made. In arguing for a global solution to a global problem, Mr. J. M. Mwanakatwe, Governor for Zambia, considered the proposals “totally inadequate” since none of them “seriously tackles the less developed countries’ problems or their needs and requirements except in terms of superficial generalities.” The demands of the developing countries were justified, Mr. Yadav Prasad Pant, Governor for Nepal, believed, because most of them have “very limited access to short-term credit facilities outside the Fund, even though their need for such facilities is proportionately greater because of the vulnerability of their export earnings.” In common with other Governors he looked to the monetary system to provide for at least some of these needs in order to promote, as Mr. Edgardo Suárez C, Governor for El Salvador, put it, “the integral development of the less favored nations by reducing the enormous differences now existing between the levels of prosperity in the industrialized countries and in our developing countries.” Mr. Suárez spoke on behalf of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, Venezuela, and the Philippines.
Speakers from the industrial countries, while concentrating more on the details of reform, were by no means insensitive to these issues. Indeed, in summarizing the eight points agreed upon by the members of the European Economic Community, Mr. Valéry Giscard d’Estaing, Governor for France, emphasized that “the special problems of supplying developing countries with liquidity must, in this connection, be solved by a specific treatment.”
Behind the general principles enunciated, there was, of course, much difference of opinion. However, there appeared to be general support for the main objectives of a reformed system agreed upon by 30 Commonwealth Finance Ministers and outlined by Mr. Anthony Barber, Governor for the United Kingdom. They were that it should conform to the principle of equal rights and obligations of all participating countries; have regard for the interests of the developing countries; continue to be based on fixed but adjustable parities; provide for the effective regulation of the supply of liquidity in the world; be designed to re-establish a general convertibility of currencies; provide for securing the necessary adjustments in the balance of payments in participating countries; and have regard to the need to reduce the destabilizing effects of short-term capital flows.
The Executive Directors had dealt with many of the issues implied by these objectives in their report to the board of Governors on reform of the international monetary system. Many Governors welcomed the report and Mr. D. T. Matenje, Governor of the bank for Malawi, remarked that it bore the traces of much lively discussion and searching thought. However, Mr. Y. B. Chavan, Governor for India, felt that it could have dealt in greater depth with the problems of the developing countries, particularly in relation to the role of the monetary system in the context of economic development.
The New Committee
The report was not, of course, intended to be definitive and was, in fact, widely viewed as a working paper for the Committee of the Board of Governors established in July 1972 to deal with the reform of the international monetary system and related issues. This Committee met for the first time during the Annual Meeting and elected Governor Wardhana as its Chairman and Mr. Jeremy Morse, Alternate Governor for the United Kingdom, as the Chairman of its Deputies. The Deputies, themselves, met at the close of the Annual Meeting and are expected to hold fairly frequent and intensive meetings during the coming year in order to prepare comprehensive proposals for consideration by the Committee.
There was general satisfaction with the establishment of this “Committee of Twenty” particularly because, as Mr. Barber noted, it rightly included “the widest possible representation of world opinion consistent with a manageable number.” Mr. Shultz thought its establishment reflected and symbolized the fact “that we are dealing with issues of deep interest to all members and in particular that the concerns of developing countries will be fully reflected in discussions of the reform.” And Mr. R. D. Muldoon, Governor for New Zealand, saw the Committee as a recognition of the fact that “there is no place for economic colonialism in today’s world.”
The representatives of the Third World also welcomed the establishment of the Committee. Mr. Suárez considered it to be a positive step which would contribute favorably to international economic relations.
While not minimizing the analytical and political difficulties involved, the Governors were anxious that the reform work should proceed quickly. “Let us see,” said Mr. Shultz, “if, in Nairobi next year, we can say that a new balance is in prospect and that the main outlines of a new system are agreed.” Mr. Giscard d’Estaing suggested that the reform, because of its complexity and the varying urgency of the issues involved, should be accomplished in three stages. At the 1973 Annual Meeting arrangements regarding the exchange rate mechanism and “specific monetary arrangements in favor of the developing nations” should be finalized. “In a second stage, the restoration of the convertibility of currencies could be brought about.” In the course of a third stage, “the fundamental problems of the numeraire and of supplying the new system with liquidity should be dealt with.”
What Sort of Reserve Asset?
Many Governors saw the need for changes in the characteristics of the SDR if, as they hoped, it was to become the center of any future system. Mr. George Colley, Governor for Ireland, thought it would be necessary to “effect radical changes” in the “usability and acceptability of SDRs in transactions” and to introduce the “payment of a satisfactory rate of interest on SDRs” to facilitate the replacement in national monetary reserves of high yielding and universally acceptable foreign exchange by SDRs. Mr. Feldt was among those who saw this replacement of foreign exchange as taking place in the context of a system where all countries would settle their deficits not in their own liabilities but in primary assets, among which the SDR would play a leading role. However, he warned that it would be necessary to guard against contractionary effects in making the transition to such a scheme. Mr. Schmidt went further in maintaining that monetary reserves should not contain foreign exchange above an amount necessary for transactions. Dealing with the present situation, Mr. Wolfgang Schmitz, Governor for Austria, believed that to replace excess “holdings of international reserve currencies by SDRs would permit, from the viewpoint of liquidity control, some hope for progress, as SDRs are less volatile than a transaction currency and are subject to the harmonizing effect of the designation mechanism.” While many speakers were conscious of the need to tread warily in modifying the SDR scheme, the spirit of the meeting was caught by the Governor for Paraguay, Mr. Carlos Chaves Bareiro, who expressed the opinion that the time had come to turn the SDRs’ “passive mission into an active function.”
The problems of gold and the choice of a numeraire also received attention. Mr. Nicolaas Diederichs, Governor for South Africa, maintained that the two-tier marketing system creates difficulties for the effective use of gold as a monetary asset. However, although a few Governors spoke in favor of maintaining the position of gold, the majority followed Mr. Shultz when he observed that orderly procedures were available for diminishing the future role of gold in international monetary affairs.
As for choosing a numeraire, Mr. Giscard d’Estaing had this to say: “This choice will have to be governed by our determination to protect ourselves against the temptations of inflation and to achieve a symmetry of rights and obligations among member countries until an effective international monetary authority is recognized and obeyed.”
If reserve currencies are indeed to be phased out, some mechanism may have to be devised to replace excess holdings by SDRs. In taking this view both Mr. Mohamed A. Merzeban, bank Governor for the Arab Republic of Egypt, and Mr. Hannes Androsch, Bank Governor for Austria, thought that careful consideration should be given to the idea of devoting part of the overhang to development financing. This was seen to be one way of implementing what, at this Annual Meeting, appeared to be a broad acceptance of the establishment of some form of link between the monetary system and development finance.
Mr. Suárez distinguished “between the creation of additional liquidity… and the mechanisms which render possible a redistribution of financial resources for development.” Such creation should “continue to be based exclusively on global liquidity requirements” but some of it “could be employed—without departing from the aims of or affecting the functioning of SDRs—for additional development financing.” In fact, as Mr. André Vlerick, Bank Governor for Belgium, said, it was indeed difficult to “justify the fact that three quarters of the allocations of special drawing rights are distributed to the rich countries.” He saw no reason why “some of the SDRs created might not be used to further the development of the third world …,” and favored allocation by the Fund to such agencies as the International Development Association. Mr. Giscard d’Estaing agreed that “a fraction of the additional liquidity allocated to already industrialized countries could be transferred to the developing countries.”
However, Mr. Barber voiced the fears of some when he insisted that any form of link must not be inflationary and should “not lead to pressures for the excessive creation of SDRs beyond what prudent, internationally agreed judgment regarded as appropriate to the prospects for world liquidity as a whole.”
The crises of the international monetary system since Bretton Woods have, in large part, reflected a failure of national economic authorities to adjust their policies in response to changing world conditions. At different times, either a change in exchange rates or alternative domestic policies would have been appropriate to restore some approximation to equilibrium. Many speakers at the Annual Meeting were concerned that the adjustment process should be improved. In particular, as Mr. Shultz put it, we must “ensure that a surfeit of reserves indicates, and produces pressure for, adjustment on the surplus side as losses of reserves already do for the deficit side.” Among others, Mr. Giovanni Malagodi, Governor for Italy, recognized that in practical terms any real improvement would require “the fixing of balance of payments objectives of the principal industrial countries” that were “compatible among themselves and with the volume of aid to be channeled to developing countries.”
The determination of the appropriate exchange rate was generally conceded to be difficult. Mr. Turner did not believe “we shall be able to find a satisfactory automatic formula for determining exchange rate changes.” Many speakers, however, agreed with Mr. Malagodi that “exchange rate flexibility must be allowed to play a more important role in restoring equilibrium in the balance of payments.” In fact, both he and Mr. Shultz thought technical “indicator” approaches to the determination of appropriate changes in exchange rates worth further examination.
Governors from the developing countries expressed concern about the possible ill effects of a move toward greater flexibility in exchange rates. Speaking on behalf of Barbados, Jamaica, and Trinidad and Tobago, Mr. David H. Coore, Governor for Jamaica, said all developing countries “wish to see an early return to a stable system of exchange rates, one not as rigid and inflexible as we have seen in the past, but one which would give developing countries that measure of certainty in their trade and financial operations which is conducive to maximum development.”
Certain Governors felt that short-term capital movements were partially responsible for the severity of several recent crises. “We cannot afford” said Mr. Barber, “to have the stability of a rational and economically sensible structure of parities wrecked by ephemeral surges of short-term capital around the world.” However, as Mr. Schmidt remarked, “capital controls tackle the symptoms rather than the causes of monetary difficulties.” Mr. Shultz agreed, stating that “no country should be forced to use controls in lieu of other, more basic, adjustment measures.”
Future SDR Creation
Reform was by no means the only topic discussed at the Annual Meeting. The question of global liquidity and the second basic period for SDR allocations, for example, was also a live issue. Conventional estimates indicate that there is surplus liquidity at present. Mr. R. J. Nelissen, Governor of the Bank for the Netherlands, pointed out, however, that according to the relevant Fund Articles—which he thought should continue to stand—steps to create new SDRs can only be taken if there is an actual or threatening shortage of international liquidity, “which surely is not the case at the present time.” But some disagreed, feeling, in the first place, that when reserves are inflated by short-term capital inflows, a country’s desirable level of reserves also increases. It was Mr. Suárez’ opinion that the present concept of “need for liquidity” is not “sufficiently clear and complete and, therefore, additional research on the subject is needed, which should include perfecting the methods of projecting future requirements and the preparation of more precise estimates of the demand for international liquidity resources, not only from the public sector, but also from the private.” Speaking on behalf of Dahomey, Ivory Coast, Mauritania, Niger, Senegal, Togo, and Upper Volta, Mr. Babacar Ba, Governor for Senegal, commented that “the distribution of fortunes and incomes is much more important for the proper functioning of any society than is the total amount involved.” In this context, Mr. François Pehoua, Alternate Governor for the Central African Republic, remarked that “the supply of international liquidity should be more effectively distributed and allocated in order to prevent the emergence of any excess; as part of the operation the developing countries, whose need is greater than that of others, should receive a larger share of SDRs.” He spoke on behalf of Cameroon, the Central African Republic, the Republic of Chad, the People’s Republic of the Congo, and the Gabonese Republic.
Mr. Koshiro Ueki, Governor for Japan, raised another consideration relevant to the next basic period in saying “from the standpoint of maintaining confidence in the SDR, it was highly important that SDR allocations be continued.” While Mr. Malagodi and others also argued that the process of SDR creation must not be interrupted, Mr. Nelissen was among those who thought that to create SDRs in the absence of an actual or threatening shortage of international liquidity “can only have a detrimental effect on future confidence in the SDR.”
The Role of International Cooperation
The interrelationship of trade, finance, and development has received an increasing amount of attention, particularly in past year. The Governor for Kenya, Mr. Mwai Kibaki, hinted at one aspect of the new concern when he urged that the problems of nontariff barriers to trade be overcome in order to “allow the countries outside the main economic blocs—now principally the developing countries—to sell the products that result from their development programs.” The other main strand of recent discussion has come from the United States; Mr. Shultz, while suggesting that monetary reform need not wait on the results of specific trade negotiations, thought that efforts should be made to build incentives for trade liberalization into reformed monetary rules, and to integrate better the work of the GATT and the Fund.
Looking back at the realignment of currencies, spokesmen from the Third World, such as Mr. Mwanakatwe, saw the events of late 1971 as no more than a compromise within the Group of Ten reached without reference to the interests of the developing countries and on the basis more of political than of economic considerations. The establishment among the developing countries of the Intergovernmental Group of Twenty-Four on International Monetary Affairs, was one outcome of the reassessment of those structures most suitable for international cooperation in the monetary field. However, Alhaji Shehu Shagari, Governor for Nigeria, thought that the Group should, like the Group of Ten, fade away as the monetary reform movement gathers momentum, especially in the light of the creation of the Committee of Twenty. Conversely, Mr. N. M. Perera, Governor for Sri Lanka, attached great importance to the continuance of the Group of Twenty-Four, lest “the tutelage of the Group of Ten [be] replaced by [that] of the Committee of Twenty.”
The increasing cohesion of European monetary union also raises questions regarding international cooperation, but, for example, Mr. Vlerick was sure “that a united Europe will be more liberal as regards the question of the distribution of SDRs between rich and poor countries.” In general, as Mr. Giscard d’Estaing put it, the fears that future monetary relations would be organized around separate blocs were clearly beginning to disappear.
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The degree of understanding reached was well summarized by Mr. Schweitzer at the end of the meeting: “conditions for a concerted attack on the issues of international monetary reform are now much more propitious than they looked a week ago. I feel confident that very substantial progress can be made by the time of next year’s meeting in Nairobi.”