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Collection: Paul A. Volcker Papers
Call Number: MC279
Box 20
Preferred Citation: Group of 30, Bermuda Meeting, 1979 February 17-18; Paul A. Volcker Papers,
Box 20; Public Policy Papers, Department of Rare Books and Special Collections, Princeton
University Library
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CONSULTATIVE GROUP ON INTERNATIONAL ECONOMIC AND MONETARY AFFAIRS, INC.
May 10, 1979
TO:
All Members
FROM:
Ronaldo Howell
Enclosed herewith please find the Report of the Group's
meeting in Bermuda.
Also included is a verbatim report of two
sessions, which we hope will help you to recall the flavor of
the discussions.
I shall be back to you shortly to make arrangements for our
////
next meeting, which will be held in Yugoslavia.
Respectfully yours,
Ronaldo Howell
RECEIVED
MAY 1 4 1979
P.A.V.
ANSWERED
AllgiNDED
11.1.
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1
GROUP OF THIRTY
(Consultative Group on International Economic and Monetary Affairs)
Bermuda Meeting, 17-18 February 1979
February 17--First Morning Session
Introductory Discussion
The Chairman welcomed the group to its first meeting and informed the members
that a private corporation had been set up under the laws of the State of
Delaware to handle the group's affairs. Its headquarters would be in New York
and offices would soon be established in the World Trade Center. The Steering
Committee members would serve as Trustees of this non-profit corporation. An
Executive Director, Robert Pringle, and an Administrator, Ron Howell, had been
appointed.
At the first meeting of the Trustees, it had been decided to seek funds from
other sources in addition to the Rockefeller Foundation as this would allow the
corporation a more favourable status under United States tax laws.
The group, which had been called the Group of Thirty, would be extending its
membership from the present 28 members to its full complement of 30 in due
course.
Minutes of the meeting were to be taken, though no names would be mentioned
in the final report. The Chairman had to leave the meeting after the two
morning sessions, his place being filled by another member of the group, Dr.
Otmar Emminger, pro tem.
The first morning session was to be given to an exchange of views on the
subjects the group wished to discuss and to a consideration of further work it
wished to undertake in the future. The group concentrated on three aspects of
the subject:
(a) the framework for, and the general nature of, the discussions to be
undertaken;
(b) the procedures which should be followed in organising discussions
and research;
(c) the future programme.
1.
The framework for, and the general nature of, the discussions
In the course of discussion the group was reminded that its aim was to find out
what was wrong with the world's economic and monetary system, and if possible,
to make a contribution towards improving it.
1
1
1
1
1
1
1
1
1
1
1
1
1
2
It was not anticipated that the group should aim to reach a consensus on the
topics it discussed, though at some points it might produce a joint paper or
agreed position.
It was generally agreed that the group should not be preoccupied with matters
which were already much studied, such as the technicalities of the European
Monetary System and of the Euro-markets, but should consider more broadly based
topics concerned with the nature of the international system itself, and the
factors which lay behind specific problems.
It was noted that the make-up of the group, including as it did several
distinguished members from developing countries, reflected an increasing
awareness of the interdependence of North and South in the modern world. There
was concern that the predominance of members from advanced industrialized
countries might give the group a Northern bias. It was suggested that it would
be unrealistic for the group to try to avoid taking, to some extent, a Northern
view of subjects, but that it should constantly have in mind the need to take
account of the concerns and interests of the developing countries.
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consider underlying factors and the
A compromise was suggested in terms of which the group should not be prohibited
from considering short-term problems but should tackle them as current
manifestations of problems in the underlying structure of the system. If the
perspective of the group were basically medium and longer-term, short-term
questions would be considered from a broader angle.
2.
Procedures
The group recognized the necessity for a distinction between the issues on
which it wished to hold substantive discussions itself, and discussion of
projects on which it would like to see further research carried out. It was not
intended that research should be generated on every aspect of the group's
discussions.
The function of the Academic Panel would be to survey and summarize research
already undertaken, to formulate questions which needed to be asked and to
commission work itself. It would be ready to advise the core group on the best
operational approach to the research which the group wished to be seen
undertaken. Its membership was shortly to be enlarged by two new members. It
was stressed that the time scale of the programme for academic work was
important. There would be a considerable time lag between deciding on subjects
to be researched, setting the work in progress and actually receiving the
results.
3
The different methods of undertaking research or further consideration of a
subject should be considered so that the method most appropriate to each study
could be decided upon. The group had been set up in such a way that it would
be possible to commission individual case studies as well as to set up study
groups to prepare reports for the core group, in addition to the work of the
Academic Panel. Reports of study groups would enable the core group to be
responsive to immediate as well as longer-term issues.
3.
The future programme
Bearing in mind the constraints recognized under (a) and (b) above, it was
decided that since research was already under way on monetary matters (for
example, in the Weatherstone Group), and since the next meeting of the core
group would follow immediately upon the IMF annual meeting, monetary subjects
would be discussed in September. Economic subjects, the research for which
would require a longer time span, would be reserved for 1980. Specific ideas
suggested by members for further study would be discussed by a small group
before the next meeting in the autumn.
February 17 - Second Morning Session
Reserve Asset Diversification
It was suggested that the group should begin by trying to explain why there
was a move to diversify reserve assets, to establish its causes, examine how it
took place and its likely consequences in the medium and long term, in addition
to the short term effects of the actual processes of moving to a new system.
It would be helpful to look at the alternative vehicles for diversification,
but also to assess both those which were most likely to be acceptable and
whether this development would be a stabilizing or destabilizing influence in
the international system.
A distinction was made between the movements in official and private reserves.
On the official side the influence of the Group of Ten and the guidelines it
set up were important. So far the diversification process had been kept within
manageable rates. There was an opinion that central banks could become
increasingly reluctant holders of the by-products of their intervention
policies, if private holders continued to diversify. Another speaker pointed
out that this would only result if central banks continued their policies of
intervention.
The group considered the question of the movement of reserve assets held
by private concerns, such as multi-national companies and pension funds. It
noted the distinction to be made between speculative buying and the desire for a
more stable reserve asset base.
As to whether an improvement in the US economy would have a significant
influence on movements out of the dollar, there was some difference of opinion
within the group. Some members felt that diversification was likely to continue
whatever the circumstances of the US economy, others felt that with a marked
improvement, there could be a strong flow back to the dollar.
4
This influenced opinions as to whether the world should be making provision
for a non-disruptive phasing out of the dollar as the principal reserve asset.
There was some feeling that the only option was to re-establish confidence in
the US economy which would call for a collaborative relationship between the
United States and the rest of the world, while on the other hand, many speakers
said that the desire to diversify was more than a short term change in fashion
and that the alternative ways of organizing reserve asset holdings should be
examined.
The optimum situation, it was suggested, would be for the establishment of a
single well -managed national reserve asset for the world. However, the
historical evidence was that a single national reserve asset would not be well
managed.
There was considerable feeling in the group that a system of multiple reserve
assets would not be stable. There was then the alternative of a multi-national
reserve asset, such as the SDR. In this case, experience had shown that it
would have to be made a more attractive asset to hold.
When considering the mechanisms for ensuring stability during the process of
reserve asset diversification, the possibility of establishing a substitution
account, or multiple substitution accounts, needed to be examined.
The particular problems of the developing countries resulting from the
increasing tendency towards reserve asset diversification needed to be
considered, it was suggested. It was difficult for central banks in
developing countries to explain to their political masters why, when an
increasing proportion of their trade was carried on with Germany and Japan,
their reserves had to be held in dollars. The developing countries were not
unsympathetic to the problems of Germany and Japan, but there needed to be
channels for discussion and exchange of views on these problems and the possible
ways of dealing with them.
Further questions which developing countries would like to see answered
concerned: (a) the SDR--there had not been much heart behind the officially
sanctioned move to use of this asset, and further discussion of the SDR
substitution account was called for; and, (b) the attitude of central banks to
gold, which was supposed to have been demonetized, but which was being valued
at market rates in the EMS.
The acting chairman summed up the discussion by stressing the need to look at
the ways in which interdependent communities could co-ordinate their policies.
He felt that the setting up of a study group to look at the reserve asset
system and the related question of substitution accounts would be the best way
to handle the subject.
February 17--Afternoon Session
The Exchange Rate Regime
The afternoon discussion began with Professor Kenen's review of several of the
key policy questions raised in his overview paper on the present exchange rate
regime. On the initial topic of the fixed-rate system, the group decided not
5
to devote more time or effort to strictly fixed rates, as it was argued rather
persuasively that the adoption of flexible rates since 1973 and the resulting
modification of the IMF's articles of agreement in effect precluded the
resurrection of the par-value system.
The discussion then shifted to the reasons for the lack of responsiveness of
the adjustment mechanism to changes in exchange rates. This also raised the
question of the role of exchange rate policy and how much reliance should be
placed on it in correcting international imbalances. Related to this set of
issues is the kind of discipline (or lack thereof) that a floating exchange
rate imposes on individual countries.
While it is difficult to isolate these critical influences of the floating
exchange rate system on any given country, many members expressed the view that
floating rates can exaggerate the underlying economic fundamentals. In some
cases, however, internal economic policies had exacerbated the volatility of
its currency. Other members emphasized the consequence of the interaction of
the individual and collective economic performances and the interplay of
political events.
On the linkage between the exchange system, the adjustment process and currency
movements, one member suggested that under fixed rates the appreciation of
certain currencies (e.g. DM and yen) might have been more "orderly" in the sense
that there was a more formal mechanism for the adjustment of exchange rates
when they were out of alignment. Other members questioned whether even large
movements in nominal rates under floating had been effective in bringing about
long-lasting changes in real rates.
A question arose regarding the exchange rate management policies of developing
countries. Most developing countries peg their exchange rate to one of the
primary floating currencies (notably the dollar). The question of alternatives
to pegging for developing countries was raised. The group was informed that
the IMF staff had done a considerable amount of work on the appropriate exchange
rate for developing countries and these studies would be made available for
review.
The IMF and OECD had also conducted work on the extent to which and speed
with which changes in real rates have been effective in achieving shifts in
current-account balances. This discussion assumed however that one can measure
the real currency appreciation or depreciation, though some members doubted
this could be done precisely. It was suggested that the Academic Panel should
examine these questions and commission papers for submission to the group at
its next meetin
February 18--First Morning Session
EMS and the working of the international monetary system
In the early part of the discussion some points on the internal functioning
and technical problems of EMS were raised. However, the group was reminded
that the paper under discussion dealt with the relationship between EMS and the
rest of the world. It was suggested that it would be more useful to centre
discussion in this area.
6
On the subject of EMS's relations with the global monetary system three
questions had already been raised in the paper under discussion on pages 3 and
4, and a fourth was added from the group asking what would be the impact on the
world system of combining in a mini -Bretton Woods system six of the ten largest
economies in the IMF.
It had been established in the early part of the discussion that the EMF
required mandatory intervention at the limits in members' currencies, as was
the case with the snake, and that although intra-marginal intervention could be
in dollars, dollars would not be used if that currency were under pressure. If
intervention were to be mainly in Community currencies and central banks were
to settle in ecus rather than dollars, the question was raised as to whether
this would lead to greater use of the European currencies as denomination and
invoicing currencies, and the future of the ecu. There was also the question
of whether this would lead to less holding of the dollar for settlement and
other purposes.
The group discussed the possibility that the sort of regional grouping which
the EEC was aiming for might be set up in various other areas, with the regional
groups floating against each other, either in a free, or managed float. The
general view, however, was that fixed exchange rate zones in other areas would
neither be advisable nor feasible, and this applied especially to groups
including newly industrializing countries. One member felt that in order to
integrate the new economic powers into the world system, it was important to
retain the possibility for relatively smooth adjustment of real exchange rates
It might be helpful to have somewhat more managed rates within areas, but any
such arrangement should reflect the need for real exchange rate flexibility
between old and new powers.
There was
would not
had their
inflation
also an opinion that this extension of the regional grouping idea
fit the real world. Countries such as India and the oil producers
own reasons for exchange rate movements, while others had high
rates and would not be suited to join in zonal arrangements.
Looking at the reality of the political situation in the Asian countries
around Japan, they had none of the sort of institutional traditions of the EEC
area to make such an arrangement feasible. They had no wish to give up the
prestige of national sovereignty and most trade in the area was expressed in
dollars rather than in yen as the settlement currency.
However, alternatives under consideration were not a straight choice between
fixed and floating rates, it was pointed out. Within the spectrum of floating
rates there was a point at which it was useful to introduce the concept of
"stickiness" in exchange rate changes. There was a need to retain if possible
what had been useful in the Bretton Woods system.
The whole question of the management of exchange rates raised many problems.
Were they to be managed for structural reasons, so that some estimate could be
made of forward rates, or for cyclical reasons in order to try to avoid cyclical
changes being driven into the real economy, or for the sake of the restraining
effect of "stickiness" on a country's policies?
7
Second Morning Session--18 February 1979
Report on the Weatherstone Study Group
Three principal areas of the Weatherstone Report were reviewed by the group.
The first concerned how the increased number of market participants and the
reduction in the number of principal market makers in the foreign exchange
markets have influenced the movement of exchange rates. The second area of
discussion revolved around whether or not the impact of accounting changes on
US corporations have increased overall currency volatility. Thirdly, the group
discussed one of the major differences between international foreign exchange
markets in the degree of regulation on the trading activity of commercial
banks.
The Weatherstone Report implied that basic economic imbalances among the
major countries were the primary sources of currency volatility. The floating
rate system sui generis does not appear to be one of the root causes of
instability. However, there are other salient factors--namely, technology, the
larger number of participants and smaller number of principal market makers-which have to some extent modified trading practices and patterns, but should
not be confused with systemic developments. Continuous trading of foreign
exchange around the globe, for example, has given rise at times to thin one-way
markets. Nonetheless, it was generallly agreed that the currency markets under
floating rates have functioned rather well despite disruptive economic shocks
and the structural changes of the market.
As stated in the report, it is difficult to determine the impact of additional
foreign exchange activity brought about by changes in the US accounting
standards. Of these, the most important is the Financial Accounting Statement
No. 8, known simply as FAS 8.
It requires US corporations to recognize in all financial statements gains or
losses on the translation of all of their liabilities and certain assets
denominated in foreign currencies. Several studies have shown that despite the
increase in corporate activity related to foreign currency exposure management,
FAS 8 has not materially contributed to currency volatility. It has, however,
contributed to some distortion in the financial statements. One member pointed
to the sharp rise in interbank volume and bank profits from foreign exchange
activity. The group was reminded that the volume of interbank transactions
originate as commercial orders from private sources and not from bank trading.
Further, it was suggested, even though foreign exchange profits had risen, the
trading risks have increased as well.
The Weatherstone Group was asked to continue and expand its current study
efforts to include, in particular, (1) how market participants' view official
regulation and its relationship to the changing nature of the market. (2) How
developing countries' central banks might take better advantage of the forward
markets. (3) How changes in invoicing practices might influence currency
movements and (4) how several broader questions raised in Professor Kenen's
report relate to the nature and operation of the exchange markets.
8
Third Morning Session--18 February 1979
International Banking and the Euromarkets
After a brief discussion of this topic, the following comments were made from
the Chair.
(a) Facts and interpretation
An analysis both of the relevant recent facts relating to international
bank lending and deposits and also an interpretation of the facts
would be useful to the Group. In this category should also be placed
the role of bank lending in international reserve creation; the
contribution of bank lending to the overall payments 'speculative'
deficit of the United States; and the markets' role in facilitating
movements of capital, leading and lagging and so forth.
(b) Costs and benefits
Some members had described the benefits of the markets; others
described some of the worries--the markets' inflationary potential,
prudential aspects, the disturbing effect on domestic monetary
policies, the possible effect in delaying necessary adjustment policies.
There were also the new worries in the United States about the
effect on US monetary policy. A paper on this for the next meeting
could put all sides of the case without coming to a definite conclusion.
(c) What are the factors that make the markets grow?
The size of the "Eurocurrency credit multiplier" and related issues.
The Academic Panel might look into this question.
Afternoon Session--18 February 1979--The Pringle Report
Policy Co-ordination
This subject had been among those suggested for further discussion by Robert
Pringle's report. It was considered to be an important topic since the
interdependence of nations would continue whatever the exchange rate system
happened to be. It was noted that the last good work done in this field was
that by Richard Cooper ten years ago in his book, "The Economics of
Interdependence."
There was some feeling in the group, however, that there were plenty of bodies
and mechanisms already existing for ensuring co-ordination, but since the
political will to bring this about was lacking, they were ineffective.
Other members felt that even acknowledging this difficulty and the difficulty
of gaining information in a field where personal recollections and assessments
were an important research source, it would be worthwhile making an attempt to
9
pursue the subject further. The aim would be to look for inconsistencies in
policy of a structural or political nature and to ask why mistakes had been
made in the past, rather than to recommend the establishment of any new bodies.
There was a view that a prior problem which should be considered was the
possibility that different nations had differing perceptions of their priorities
and different levels of tolerance in their acceptance of certain conditions.
It was necessary to take account of the fact that, for instance, developing
countries might be willing to accept a higher level of inflation in order to
avoid unemployment problems, while advanced countries might have the reverse
order of priorities. The threshold of tolerance differed in different
countries, for example, over the degree of recession which was tolerable, which
might safely be higher in countries with more stable political institutions.
In looking at co-ordination, it was thought important to recognize the way
in which the political feed-back from international or regional meetings could
influence national decisions. These meetings were part of an important
conditioning process at all levels. In fact, the level of decision making, it
was suggested, had been pushed up over the years from the official to the
ministerial, to the level of heads of state, until now even heads of state
could not take decisions, but had to go back to pressure groups and legislatures
--such as Congress in the American case.
It was suggested that a useful case study in this area would be policy
co-ordination between Japan and the USA.
It was recommended that the Academic Panel should be consulted about the best
way to set up a study on this subject and should provide a report in time for
the October meeting. It was thought that any study group on the subject should
contain academics, practitioners and national officials.
The Group of 30--Final Session--18 February 1979
Final Summing-up From the Chair
The subjects discussed in the past two days may be divided into six categories:
(1) Diversification of reserves and a multiple reserve currency system;
(2) Exchange rate problems and overlapping with this;
(3) The exchange markets;
(4) The European Monetary System;
(5) International bank lending and offshore markets;
(6) International policy co-ordination.
10
1.
Diversification of reserves and a multiple reserve currency system
Here some of the main questions were the following:
Under what circumstances would such a system be stable? What ideas could
be conceived for making it less unstable? Also there were the factual
questions relating to the extent of diversification and the role of the
Euromarkets in faciliating the process. This subject could be studied by a
Study Group or approached by commissioning a number of papers or by some
combination of the two approaches.
2.
Exchange rate problems
Some of the leading questions here were the following:
How well or how badly has the present system functioned? Are we confronted
with systemic or policy faults? What has been the extent of real exchange
rate appreciations or depreciations and what have been their effects? To
what extent can Governments alter the real exchange rates of their
currencies? What has been the role of speculative movements in exchange
rates? Then there was the question of the overshooting of exchange rates
(which could be investigated both from the side of the Weatherstone Study
Group and the Academic Panel) and of "stickiness" of rates. Some countries
of course peg their exchange rates and there are arguments to be
investigated in favour of this, drawing for instance on IMF material. The
possibility of fixed exchange-rate regimes on a regional basis was also
discussed and some members raised the further questions of practices in the
invoicing and settlement of trade and their implications, notably for
developing countries. This investigation should lead therefore not only to
study the past but also goes into the future.
3.
The exchange markets
The Weatherstone study group should continue.
It should investigate among other aspects the whole subject of overshooting
and deal with some of the questions in Professor Kenen's paper.
4.
EMS
It was not considered necessary to continue with the Study Group on this
subject nor to commission papers. A substantive discussion of current
issues could however be held by the Group at its meeting in October if
considered appropriate.
5.
International bank lending and offshore markets
No study group may be necessary at present.
Dr. Lamfalussy is however to be asked to make proposals as to how the
various aspects of these markets might be investigated further and to
advise the Steering Group accordingly.
11
6.
International policy co-ordination
A wide-ranging discussion was held on this topic, focussing particularly on
the question of how well or badly co-ordinated decision-making had
functioned.
Various suggestions were made as to how this subject might be studied further;
these could be considered by the Steering Committee and by a small ad hoc
committee which was to be formed to consider a possible agenda for the Group's
work in 1980.
1
INTRODUCTORY DISCUSSION OF TOPICS
Member:
One of the most important problems is the further study of the
possibilities of a substitution account.
Member:
I support the idea of studying the possibilities of a substitution
account in the general context of policies over reserve composition
and in the context of some analysis of how a multiple reserve
system would operate. Another important subject is the functioning
of the Eurocurrency markets or offshore markets. A lot has been
said about this but there are many different views and the market
is growing and has an impact and raises questions of the appropriate
form of control and whether control is necessary. A Study Group
might be an adequate way to approach this. Then there is the whole
question of the co-ordination of intervention and exchange rate
policies.
Member:
There is the problem of the effect of exchange rate changes on
the balance of payments and the time lags involved.
Member:
This morning we are stretching our minds over
and economic subjects. We shall find that we
a discussion of the ingredients of structural
world economy. We cannot take on every issue
to monetary issues.
Member:
Two important subjects have been mentioned--relations between
advanced and developing countries and the Eurocurrency market. We
need a summary of the main questions to ask of both subjects. I
and others must admit we are not clear what the questions are.
The Academic Panel should sort out the issues in a way that is
operational so that research can be done and be discussed by us.
Member:
We should distinguish between the broad issues we want to discuss
here and projects for research. The two should be connected, but
we need not generate research on every subject. The Academic
Panel will commission others to do the research for us. The next
meeting may seem a long way off but it is close in terms of
commissioning papers. We need to think of the range and sequence
of our discussion. If we deal mainly with monetary issues this
year and in 1980 turn to structural change and trade policy we
need to look ahead a year. Two more members of the Academic
Panel are to be appointed.
Member:
Since we are starting with the EMS we could have a paper for
next October on the EMF and discuss what the group thinks of this
fund.
both monetary
are drifting into
change in the
but are not limited
2
Chairman:
The Study Group will have this in mind; this should be one of the
subjects for October.
Member:
We should study both economic and monetary problems.
system is only a means.
Member:
We should distinguish between three categories of issues: an
analysis of present problems, future policies (as for instance a
substitution account) and present protective measures including
the EMS, multi-currency reserve policies, etc. In reply to a
question from the Chair the member said we should concentrate on
the first question but not exclusively.
Member:
We should plan to discuss these technical subjects against some
background or scenario of where we think the world will be moving
in the next few years. Is the dollar overhang going to persist?
Where will the major surpluses and deficits be located? What
growth rate is foreseen for LDCs? What is the future of the
Pacific Basin and the Middle East? Monetary questions will depend
partly on how the real economy is going to develop. What are our
views?
Member:
We should not run straight into subjects that everybody else is
talking about, such as the EMS or Eurocurrency market. The real
questions are how the system as a whole will develop over the next
five or ten years and what we can do about it--these are the
subjects we should tackle. Filling up little holes with
coefficients is not important. The big questions are about the
system. One approach would be to ask what has gone wrong and
why--why for instance have some countries coped so much better
than others. We should also consider discussing the views of
people who have views. We should try to get these together
and develop some vision of the future.
Member:
There is a need to differentiate our product. What can this group
with its independent status contribute? The operation of the
money and capital markets and the exchange rate system are
important, but we need to go behind them if possible. Pringle's
paper shows areas where not enough thinking has been done. For
instance, the first question Pringle poses--are the problems
essentially domestic or international? How is it that some
countries have coped well? Insofar as we agree we are facing
international problems, what is their nature? How far are they
the subject of economic analysis and to what extent do they
From the political and institutional environment?
cannot tackle these without looking at the political decisionmaking process. How are decisions taken in an increasingly
interdependent world? That is the question.
The mcnetary
I
3
Member:
To follow up this idea, Pringle's paper on page 6 puts a question
about the various arenas of international cooperation and about
the respective roles of inter-governmental and inter-central bank
cooperation. We have representatives of all such groups. This
would give a basis on which to follow up the question. What is
hampering international coordination and what are the factors in
decision-making in these fields?
Member:
I support the suggestion that we consider economic questions
next year, so that we may have time to discuss what questions we
want to develop. I would like to suggest ideas on such questions.
One of the most important is the new aspect of unemployment in
advanced countries. What is the threat to unemployment from the
growth of advanced LDC trade? Then there is the future role of
big companies of the manpower resources of some Eastern countries
and especially of China; the threat of protectionism (with special
reference to compensation agreements); the price of energy.
Member:
Two subjects in particular deserve further discussion. One is
the balancing effect of autonomous capital flows; another is the
feasibility of 'external reflation'--by the export of purchasing
power to LDCs. What is discussed at summit meetings is always
internal reflation within the advanced countries. But external
reflation would be less inflationary and we could discuss ways to
achieve this. We should reinforce the Academic Panel with people
specifically interested in such ideas.
Member:
We should not duplicate other people's work. As another speaker
has noted, the efficiency of international policy coordination has
not been explored elsewhere. We come from various institutions.
In one sense it is not interesting to talk about current
preoccupations, e.g., EMS, international liquidity, etc. But there
is a longer-term perspective where we could evolve forecasts or
scenarios. Most people do not have time to do this because they
are so involved in day-to-day issues and management.
Member:
We are concerned with present day problems and we also have
to look ahead. We need to make up our minds: there is the
possibility of trying to have some influence on developments
leading up to decisions that will be taken in the next six to
twelve months, as for instance on the substitution account or
Euromarket controls; there are also the longer range problems-for instance, where developments in the offshore markets could
lead to. The Chairman could give us his thoughts on this perhaps
as he will not be here this afternoon.
Chairman:
It is a fundamental choice but perhaps we should hear some more
views first.
4
Member:
Why are industrialized economies more rigid than they used to
be? What are the implications of the rapid shift in comparative
advantage now a small group of LDCs have such an advantage?
After this brainstorming session today, someone must propose a
framework for 1979 and another for 1980 and we should be ruthless
in restricting the questions under discussion to fit in with
that.
Member:
Should we not follow the example of the Bellagio group? But
perhaps now there is a greater need for emphasis on underlying
longer-term problems.
Member:
We can focus on the long term by distillation from current issues
and those with longer-term significance. We don't want to feel
we must not go into current issues; but our aim should be longerterm. We should be able to find ourselves in agreement on the
implications of some subjects that would give rise to a joint
paper or agreed position but I doubt if there is a capability to
reach a unanimous view of the nature of the world economy. At the
same time we will instruct the Academic Panel to discuss long-term
changes.
Member:
I have been involved in OECD's Interfutures project. This got
too far away from the present. The future will depend on how
we resolve present difficulties. One approach would be to take
issues of current concern and look at them from a longer-term
point of view. For instance a substitution account would have
great long-term implications; the same with North-South issues and
protectionism.
Member:
The short versus long-run is not the issue. We have an underlying
set of problems which are on-going: exchange rates, the
Euromarkets, North-South. We have current manifestations and need
for policy actions in all these fields. We need to look at many
issues but with a good understanding of the underlying structure
of the problems and their analytics. The analysis is not agreed on
what makes exchange rates move nor on how the Euromarkets function.
Member:
On the front burner for October we should have the reserve position
question; private capital and money markets; and a range of
exchange-rate problems. On the back burner we should have NorthSouth questions; and some case studies.
Chairman:
To summarize, there are a number of conclusions:
Several members feel that we should do work on more basic issues-the real economy, changes in the world economy, the implications
of the growth of exports of developing countries, unemployment.
We agreed at our introductory meeting that we would have to move
into this field at some time. As Kenen has said, it would be
useful to try to agree on the sequence. Work on the long-term
5
of the world economy will take time. We must avoid
generalizations. We may perhaps begin to outline subjects to be
taken up in 1980, and we can ask the Academic Panel to prepare
some studies. In October this year we had better concentrate on
monetary subjects, but a wide range of subjects placed in the
context of the fundamental aspects and long-term development.
We can get the best view of the longer-term by concentrating on
the problems we see now. We also need to avoid duplicating
the work of others.
I
We need a fundamental and long-term analysis of reserve
diversification and a substitution account; the capital markets;
and a third subject--exchange rate management--that is more
difficult and more related to the real economy. Finally, could
we do something by concentrating on case studies or country studies
to see how they coped? We might for instance look at different
I.veloping countries and ask why some are succeeding and some
lag behind.
RESERVE ASSETS, DIVERSIFICATION AND A SUBSTITUTION ACCOUNT
Member:
Perhaps we can draw on the different experience of different
participants. The deep questions that arise are: Do we need
a multiplicity of reserve assets or can we get along with two?
What are the hazards and anxieties of having four assets as
opposed to the use of SDRs? Can we contemplate the world working
well with a number of reserve assets? Is there less reason rather
than more for encouraging other countries to take on a reservecurrency role?
Member:
Of course these are basic questions but there is another one:
not what we would like to see happen but what will happen.
There is no doubt that reserve diversification is taking place.
It is possible to argue that the process will stop, if the dollar
recovers and there is a fundamental change. But I do not think
diversification will die down; prudent portfolio management is
behind it.
Member:
We could discuss various schemes and techniques for managing
diversification, remembering that private diversification could
even be encouraged and could swamp official diversification. We
should remember that central banks of the Group of Ten have
renewed the agreement not to redeposit funds in the Euromarkets.
What in fact is the agreement?
Member:
First, the agreement among the central banks of the Group of
Ten has been reaffirmed. The Eurodollar holdings of the G10
central banks are only about $10 billion, compared with total
central banks Eurodollar holdings estimated at $80 billion or
more (there are various estimates). So, G10 holdings are a minor
part; but the total reserves of G10 countries are so large that if
they really moved into holding reserves in the Euromarkets this
would make quite a difference. Secondly, reserve diversification
so far has been at a pace which appears to be manageable. G10
central banks have by far the largest part of their currency
reserve in dollars and the total has been increasing. But some
banks outside the G10 group have been diversifying on a
considerable scale. Thirdly, there is diversification on the part
of multinational corporations and pension funds. However, even
this in conjunction with some official diversification has been
manageable. I draw this conclusion from an analysis of the US
balance of payments; but it is true that it could get out of
hand.
2
Member:
The marginal rate of diversification is high. During the third
quarter of 1978 central banks put about $8 billion into
international bank deposits, of which $4 billion was in non-dollar
assets.
Member:
Is not diversification merely a symptom?
Chairman:
We should consider the problem in all its aspects--why, how, and
what are the consequences of diversification and only then whether
we like it or not.
Member:
We have the reaction of the market and should not say this is
bad--the consequences of not having the reaction might be worse.
Big private companies as well as central banks outside the Group
of Ten are taking decisions in terms of market-related exchange
rates and expectations.
Member:
I would put the problem differently. With the move to flexible
exchange rates, people would have diversified even if they thought
that the dollar would be stable because of the possiblity of it
moving down. I would make a case for looking at the official
side, because we can't do much about private diversification. On
the other hand to the extent that private diversification goes on
it will place additional pressures on currencies. Central banks
will become increasingly dissatisfied with the reserve by-product
of their intervention policies and co-ordination will become more
difficult. The SOR is an instrument of diversification because it
is a composite of currencies.
Member:
For October we should have a report on private capital markets;
a critical aspect of this is the process of private sector
diversification and the interplay with central bank diversification
Member:
It would be useful to get an idea of the changes in different
countries' attitudes with respect to reserve composition. We
might also distinguish between the advantages and disadvantages of
a world where reserves are diversified and the process of getting
there.
Member:
I would put the same question, but more fundamentally. How do
we evaluate the possible evolution into a multi-reserve system as
a permanent arrangement? Could this be stable or would it be
inherently unstable? Here we have an immediate issue placed in a
long-term perspective.
Member:
The alternative to the present system is not necessarily several
reserve currencies--it is conceiveably a single reserve asset.
Member:
We cannot explain holding dollars as the only reserve asset to
our political masters. We have no quarrel with Germany or Japan
but we can't explain why, at a time when a significant proportion
3
of our trade is with them, we still have to convert the proceeds
into dollars. This is a major political question, not just a
technical one. Why cannot we discuss this with Germany or Japan?
With regard to the capital markets, the advanced countries have
created them, but is there anything we can do to live with them
with greater safety? Also the fact is that SDRs have not taken
on; the choice seems to be in favour of own reserves, not borrowed
reserves. Another question: is there resistance to the ECU
becoming a reserve asset? Also, why is gold valued at market
prices in the EMS? It seems that European central banks have not
subscribed to the demonetization of gold.
Member:
The desire to diversify may continue even if US policy is turned
round. There is a need to prepare what can be done for orderly
substitution.
Member:
The rules of portfolio management on the stock market do not
apply to reserve-currency choice. Central banks have been pushed
into holding dollars through their intervention policies.
Member:
The indexed-fund analogy in the foreign exchange field is not
the SDR, but one's own currency cocktail.
Member:
Are we faced with a stock problem based on outstanding stocks of
dollars or a flow problem? What would be the problem if exchange
rate expectations were neutral? The real dominance of the US is
less. There would still be a process of diversification. There
is also a natural tendency for a reserve currency centre to
overreach itself. I believe that if the US economy were to
improve markedly, we might see a flow back to the dollar. There
is, however, a desire to hold assets denominated in the currencies
of the emerging strong countries. We have not really explored
fully the pros and cons of this. Are there mechanisms for enabling
currency denominations to be shifted without having a disturbing
effect on exchange rates?
Member:
I do not see how. I have a feeling that a multi-currency reserve
system is inherently unstable. If so, what are the preconditions
for moving to a system based on the SDR? It is not just a matter
of making SDRs available.
Member:
We could say that a unitary system is better if it is well-managed,
but is it likely to be?
Member:
Only the US government's economic policies can reduce the pressure,
not SDRs etc.
Member:
The US could run its own substitution account by issuing
obligations in foreign currencies, as it has in fact done.
4
Member:
If the first step is to give confidence that shifts will be
kept within reasonable bounds, the first requirement is a degree
of mutual understanding about what is going on and about what each
major country is prepared to do in the way of policy co-ordination.
Chairman:
So, substitution is a question for the longer-term. Probably
the technique of a study group would be a most effective method to
approach this question.
@FedFRASER