122. Current Economic Developments1
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PLANS FOR CREATION OF SUPPLEMENTAL RESERVES DISCUSSED AT RECENT MEETINGS
At a recent joint meeting in Washington, the IMF Directors and the Group of Ten Deputies confirmed an agreement to proceed with work toward the establishment of a contingency plan for creation of supplementary reserves.2 The Germans and other EEC countries joined the French in endorsing expanded drawing rights in the Fund but not on some of the important questions which would determine whether the rights would be more like money or more like credit. Although the US favors a reserve unit scheme, it did not rule out the possibility of compromising on a drawing rights arrangement that would constitute a new and meaningful supplementary reserve asset. We continue to hope for approval of a contingency plan at the annual IMF meeting in September.
Need for Reserves
On the need for reserves, Treasury Under Secretary Deming made two main points at the joint meeting. First, under the present situation, countries have to gain reserves at the expense of other countries. This could lead to a series of restrictive actions as one country after another tries to avoid loss of reserves by restrictions on aid, trade, and capital movements. Secondly, Mr. Deming said, the traditional sources of reserves have dried up in recent years. The gold supply increased only about $250 million in 1965 and was negative in 1966. Additions of dollars to monetary reserves all but disappeared last year as a result of a small US deficit and substantial gold conversions. In the past two years, the US balance of payments has provided rather limited amounts.
The participants discussed the possible qualitative and quantitative criteria to assess the need for additional reserves and its urgency. They talked about various symptoms which could one day lead to the conclusion that the creation of reserves was needed and also the various quantitative criteria which could guide future judgment. The result of the [Page 353] discussion was that all criteria had to be appreciated or measured together and that, finally, it was to a large extent a matter of collective judgment.
Plans for Reserve Creation
Two categories of plans for creating supplemental reserves were discussed. One would involve the creation of reserve units, probably in an affiliate of the IMF. The other would involve the creation of a new category of drawing rights, i.e., automatic drawing rights, in the Fund or in an affiliate of the Fund. No decision was taken as to the choice between these two main approaches. Both, however, would amount to the creation or some kind of new unconditional reserve asset.
Under Secretary Deming said that there was a pressing need for a plan and that there were serious risks if a plan were not agreed upon by September. The US would not, however, be satisfied with an ineffective and excessively restrictive plan. The need was for international money, not improved credit facilities, and the best way to do this was through a reserve unit. Such a true international reserve asset is unconditional in use, readily convertible into intervention currency, has adequate provisions for holding and use, is directly transferable, and is held in segregated accounts, preferably in an affiliate of the IMF. The burden of proof is on those who would advocate that reserve creation could take a form other than units to show that such an asset could meet the requirements of being fully accepted as a third form of international money.
In the discussion that followed, the Executive Directors of the non-Ten and the Deputies from non-EEC countries emphasized the urgency of reaching agreement on a contingency plan and the need for creating a money-like asset. Almost all said that they favored units over drawing rights. They also stressed that the asset must be unconditional, non-repayable, directly transferable, and segregated from regular IMF accounts. The non-Ten Executive Directors made clear that, if in the past they had no preference for units over drawing rights, this was because drawing rights had certain institutional advantages in being closely associated with the Fund. The EEC proposals for making restrictive changes in the regular Fund operations, however, had resulted in a loss of this advantage of institutional simplicity and, as a result, they now had a preference for reserve units.
In this discussion and in subsequent discussions, clear differences of views emerged among the EEC countries on the issues left open in the communique on the EEC Finance Ministers’ meeting in Munich.3 Some of the EEC Deputies actually seemed to chaff under the restrictions that [Page 354] they could not take a position until a common position had been agreed among the Six.
Under Secretary Deming concluded the discussion of the illustrative schemes by reiterating the US preference for a reserve unit and US opposition to a decision making formula that would give one country or a small group of closely associated countries a veto. Mr. Deming also suggested that in order to give the plan reality for the public in general and to define for parliaments the approximate extent of their obligations, the plan should mention the general scope of the amount of reserve creation that is contemplated. This amount could be expressed in various ways: a) as a specific amount for each year of the first five years, b) as a range for this period, or c) as a total amount with the time period not specified. Inclusion of such a provision would not prejudice the collective decision on the timing of reserve creation. He suggested that this matter be discussed at the next meeting.
After the joint meeting, Mr. Deming said in a press backgrounder that a figure of $2 billion a year for the growth in reserves of all types was being talked about more and more. The need for reserves can be related to a number of different factors but the results tend to center around $2–2–1/2 billion a year as a good quantitative judgment, though one cannot make a calculation with absolute precision, Mr. Deming said.
Remaining Problems
The first main questions which have to be decided in any kind of scheme are those related to the scheme’s entry into force and the way decisions will be taken, especially decisions concerning the activation of the scheme, i.e. the actual creation of new reserve assets. The second main questions are the use, transfer, and acceptability of these new assets—how they can be issued, how they are transferred, directly or indirectly, what the obligations are to accept and to hold them; and so on. A third question is the nature of the resource backing for these schemes and, in the case of the drawing rights scheme, whether the resources would be merged with other resources of the Monetary Fund or whether the resources provided for that scheme would be segregated. A fourth question is whether there should be any reconstitution or repurchase provision linked with prolonged or extensive use of the new assets.
Future Meetings
The Deputies and Executive Directors agreed to meet again in Paris June 19–21. In preparation for these meetings, the Fund staff will prepare papers on transferability and on separability, a revision of its illustrative units scheme, and substantially revised drawing rights proposal. The French and Dutch representatives, with some other support, urged that a working party of the Deputies be organized, after the meeting of the [Page 355] Deputies of the Group of Ten, and meet in Paris on May 18–19 to prepare an agreed plan.
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- Source: Washington National Records Center, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Limited Official Use. The source text comprises pages 20–22 of the issue.↩
- This meeting convened in Washington April 24–26. Background on the major issues and U.S. preparations for the meeting is in Current Economic Developments, Issue No. 777, April 11, 1967, pp. 3–4. (Ibid.)↩
- The Munich communique has not been found. Regarding its general contents, see footnote 7, Document 124.↩