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AMENDMENTS OF THE BRETON WOODS
AGREEMENTS ACT

HEARING
BEFORE THE

SUBCOMMITTEE ON INTERNATIONAL FINANCE
OF THE

COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
NINETY-FOURTH

CONGRESS

SECOND SESSION
ON

H.R. 13955
TO P R O V I D E F O R A M E N D M E N T O F T H E B R E T T O N WOODS
A G R E E M E N T S ACT, A N D F O R O T H E R PURPOSES

AUGUST 27, 1976

Printed for the use of the
Committee on Banking, Housing and Urban Affairs

U.S. GOVERNMENT PRINTING OFFICE
76-795 O




WASHINGTON : 1976

C O M M I T T E E

ON

BANKING,

H O U S I N G

A N D

U R B A N

A F F A I R S

W I L L I A M PROXMIRE, Wisconsin, Chairman
JOHN SPARKMAN, Alabama
JOHN TOWER, Texas
HARRISON A. W I L L I A M S , JR., New Jersey EDWARD W. BROOKE, Massachusetts
THOMAS J. McINTYRE, New Hampshire
BOB PACKWOOD, Oregon
A L A N CRANSTON, California
JESSE HELMS, North Carolina
A D L A I E. STEVENSON, Illinois
JAKE GARN, Utah
JOSEPH R. BIDEN, JR., Delaware
ROBERT MORGAN, North Carolina
K E N N E T H A . M C L E A N , Staff
Director
A N T H O N Y T . CLUFF, Minority
Staff
Director

SUBCOMMITTEE ON INTERNATIONAL

FINANCE

A D L A I E. STEVENSON, Illinois, Chairman
W I L L I A M PROXMIRE, Wisconsin
BOB PACKWOOD, Oregon
HARRISON A. W I L L I A M S , JR., New Jersey
THOMAS J. McINTYRE, New Hampshire
A L A N CRANSTON, California
JOSEPH R. BIDEN, JR., Delaware

JOHN TOWER, Texas
JESSE HELMS, North Carolina
JAKE GARN, Utah

STANLEY J . MARCUSS, Counsel
ADRIAN GILMORE BRAY, Minority
Professional
Staff




(n)

Member

CONTENTS
Page

H . R . 13955
Senate Report No. 94-1148

4
10

L I S T OF W I T N E S S E S
Charles H . Percy, U.S. Senator from the State of Illinois, accompanied byCharles Meissner
Thomas Rees, Representative in Congress from the State of California
Ron Paul, Representative in Congress from the State of Texas
Eugene A. Birnbaum, First National Bank of Chicago
Robert V. Roosa, partner, Brown Bros. Harriman, & Co
Jack F. Bennett, senior vice president and director, Exxon Corp
Walter S. Salant, senior fellow, Brookings Institution
Robert Z. Aliber, Graduate School of Business Administration, University
of Chicago
Sidney Brown, vice president and economist, editor of the Deak-Perera
report, Deak& Co., Inc
Edwin H . Yeo I I I , Under Secretary for Monetary Affairs, Department of
the Treasury, accompanied by Sam Y . Cross, Executive Director, International Monetary Fund and Nancy Jacklin, Counsel
ADDITIONAL

MATERIAL

RECEIVED

FOR T H E

104
115
131

RECORD

Memorandum from American Law Division, Library of Congress Congressional Research Service, on authority of the Board of Governors to
sell gold under article V I I , section 2 of the articles of the International
Monetary Fund
Supplementary remarks of Eugene A. Birnbaum on questions raised by
Senator Stevenson pertaining to hearings on S. 3454 as published in the
Congressional Record
Article from the Wall Street Journal titled "Doubts About Floating Rates".
Reprint of article by Edward M . Bernstein, president, E M B (Ltd.), research economists
Statement of Professor Henry Hazlitt
M r . Yeo's answers to questions subsequently received from members of
the subcommittee
(m)




2
36
39
56
67
78
82

49
63
65
139
148
150




AMENDMENTS OF THE BRETTON WOODS AGREEMENTS
ACT

FRIDAY,

AUGUST

27,

1976

U . S . SENATE,
C O M M I T T E E ON B A N K I N G , H O U S I N G A N D U R B A N A F F A I R S ,
SUBCOMMITTEE ON I N T E R N A T I O N A L F I N A N C E ,

Washington, D.C.
The subcommittee met at 10:10 a.m. i n room 5302 of the Dirksen
Senate Office Building; Senator A d l a i Stevenson, chairman of the
subcommittee, presiding.
Present: Senators Stevenson, Proxmire, Tower, and Helms.
Senator STEVENSON. The meeting of the Subcommittee on International Finance w i l l come to order.
The purpose of this hearing is to consider H.R. 13955, a b i l l to authorize the U.S. acceptance of certain amendments to the Articles of
Agreement of the International Monetary Fund, and an increase of
the U.S. quota.
The amendments would legitimize floating exchange rates. The immediate issue is whether the Congress should approve this authorizing
legislation, but the larger question is whether the amendments, the
quota increase, and other so-called reforms instituted i n recent years
fulfill the U.S. objective of moving toward a stable noninflationary
international monetary order.
We are fortunate to have w i t h us this morning a distinguished
group of witnesses, all of whom are well qualified to testify to this
large complex subject.
The first is our colleague from Illinois, the distinguished senior Senator, Charles H . Percy.
OPENING STATEMENT OF SENATOR TOWER
Senator TOWER. This morning we meet for hearings on a most important matter—the structure and functioning of the international monetary system. Since 1973, most major currencies have—to a large extent—been allowed to float. A n international monetary system based
on floating exchange rates, however, constitutes a technical violation of
the Bretton Woods Agreements and the articles of the International
Monetary Fund. This is most important because i t means that the I M F
cannot develop a consensus on "rules of the game" for our floatingexchange-rate world and act as an umpire for those rules.
Without a consensus on rules of the game and an international orga.nization to enforce those rules, the danger is increased that one or more
countries w i l l attempt to manipulate the price of their currencies on
foreign exchange markets to give their exporters an unfair competitive




(1)

2
advantage. This, of course, would put American producers at an unfair
competitive disadvantage. To avoid such an eventuality, I urge the
committee to give prompt attention to H.R. 18955.
STATEMENT OF CHARLES H. PERCY, U.S. SENATOR FROM THE
STATE OF ILLINOIS, ACCOMPANIED BY CHARLES MEISSNER
Senator PERCY. Thank you, M r . Chairman. I am very pleased to
be w i t h the subcommittee this morning, Senator Proxmire and my
distinguished colleague, Senator Helms, and my colleague from
Illinois.
*
You have a very distinguished j>anel following.
We have a vote coming along f a i r l y soon, so I w i l l be brief.
I ask your unanimous consent to submit the entire testimony that I
am presenting this morning i n the record at this stage.
Senator STEVENSON. Without objection.
[Complete statement of Senator Percy, a copy of H.R. 13955 as reported by the Committee on Foreign Relations, and a reprint of Senate
Report No. 94-1148 follow:]
PREPARED S T A T E M E N T OF SENATOR C H A R L E S H .

PERCY

Mr. Chairman, I thank you/ for the opportunity to appear before you. I t is
always a pleasure to deal wifth my fellow colleague from Illinois.
I strongly support the passage of H.R. 13955 as passed by the House and
reported by the Senate Foreigp Relations Committee. I agree with the Committee's conclusion that in renegotiating the Bretton Woods Agreement the
Administration has achieved U.S. objectives and effectively protected U.S.
interests. I n the process of accomplishing this task, numerous compromises were
made, none of them in my opinion are damaging to basic U.S. interests.
My purpose in appearing this morning is not to speak as an advocate for
H.R. 13955, but to explain to you the purpose and thought behind my own
amendment to H.R. 13955. The amendment appears as Section 4 in the bill and
amends Section 14 of the Bretton Woods Agreements Act by adding a paragraph (b). The amendment is short but very significant. I t reads as follows:
The President shall, upon the request of any committee of the Congress with
legislative jurisdiction over an international financial institution or economic
organization of which the United States is a member, transmit promptly to such
committee any appropriate information furnished to any department or agency
of the United States by such institution or organization.
The purpose of the amendment is to improve the potential of Congressional
oversight of U.S. governmental activities regarding U.S. participation in the
international monetary system and U.S. foreign economic policy. The growth
of economic interdependence and the increasing size of the international sector
of the U.S. economy necessitate greater Congressional concern to these policy
areas. For example, in this Congress we have dealt with Bretton Woods, commodity agreements, energy problems and the OECD financial safety net.
The international monetary system and the International Monetary Fund
( I M F ) , as the central institution of that system, form the cornerstone of
U.S. foreign economic policy. Yet the switch from fixed to floating exchange
rates limits Congressional access to the policy process associated with the
monetary system or the I M F . W i t h fixed exchange rates, adjustments in the
balance of payments were handled through controls on trade, financial flows,
military offset payments, etc. Congress had to approve these actions and could
express its policy concern.
However, under floating rates the adjustment process takes place in the
rate itself, in the market place with no Congressional input. The system will be
run through the I M F and the financial organizations of the OECD and G-10.
Without some access to the papers and analyses of these bodies, Congressional
oversight of the new Bretton Woods Agreements will be minimal.
Secondly, because of the expanding role of economics, there is a growing
need by Congress for international economic information. One major center of
reliable economic data is the staff and secretariats of international financial




3
institutions and economic organizations. The executive branch uses this material
in the formulation of policy on both bilateral and multilateral economic problems. I believe Congress should also have access to this economic information
if we are going to review policy options intelligently.
I n the past, we have tried to get this information, and for the moat part, I
think members of the Committee and staff of Senate Foreign Relations have
been successful because they have "friends" at Treasury or State who are willing
to "help." But on the more sensitive documents, I must admit that I find it annoying to be told: "Well, you can certainly read the documents; we will bring
them to your office and you can read them while we wait." This is really a slight
to Congress. I don't see how we can exercise adequate oversight on a basis
that maybe we can see them and maybe we can't. We must have access to information and, in turn, must be held fully accountable for the documents and
policies we approve.
The amendment has some key words in it that must be explained. First, it is
directed to the President because the responsibility for development of foreign
economic policy is shared mainly between the Secretary of State and the Secretary of the Treasury. However, other agencies such as the Federal Reserve,
the Council on International Economics, the Economic Policy Board, the Special
Trade Representative, the Council of Economic Advisors and the Office of Management and Budget, all contribute and in some cases represent the United
States in international bodies.
Secondly, the amendment does not demand all documents, but only those requested by a committee. The word committee is important because the amendment is not seen as applying to personal requests by members of Congress. I t
deals with committee business and oversight responsibilities.
The most significant modifier in the amendment is the word appropriate which
appears in the phrase ". . . transmit promptly to such committee any appropriate
information . . .". This word was very thoughtfully inserted by our colleague
Jacob Javits to avoid a constitutional clash over the issue of Congress requesting documents from the President and having him refuse. The word provides
a buffer for reasons of vagueness in that gray area of the Constitution on the
separation of powers. The Committee, however, made clear that it would not
accept a decision that sensitivity or classification of a document defined that
document as inappropriate.
The Department of Treasury is in opposition to this amendment. Their concerns are twofold. First, they believe that there is a right of executive privilege
that this amendment may violate. This is difficult to accept. The amendment
deals only with information provided to the executive branch from an external
source and given to all other international members. Second, Treasury objects
to the amendment on the basis of confidentiality of the material. They argue
that material is provided to an international organization on a confidential basis
and should be held as closely as possible. I don't accept the position that exposure
to Congress is tantamount to public disclosure. This body handles classified
documents daily without mishap. Certainly, on the Senate Foreign Relations
Committee all reports printed publicly which may have classified information
included are cleared by the executive branch. Furthermore, the executive branch
does not have an untarnished record in this area either.
One other objection has been raised, that is the issue of germaneness. H.R.
13955 deals only with the I M F and the I B R D (World Bank). Those opposed
to my amendment believe it to be too broad in its scope, applying to all institutions and economic organizations. I disagree. A close reading of Section 14 of the
Bretton Woods Agreements Act shows that the drafters of that Act, even 30
years ago when the international economy was of much -less importance than
today, recognized the interdependence of various aspects of the international
economy. The major objectives outlined were to "facilitate the expansion and
balanced growth of international trade and promote the stability of international economic relations." The Congress directed the U.S. representative of the
Fund and the Bank to formulate policy taking into account all the various aspects of our economic relations. I don't see how Congress in its oversight role
can ask any less of itself.
I urge this Committee to study my amendment closely and give its stamp of
approval. Congress must have information i f it is to do its job adequately. There
is no reason why we must duplicate the executive branch in size and staff to
effectively formulate policy options for this country. We are one government,
not two. There is no reason we cannot share the information provided to our
government resulting from U.S. participation in an international institution
or organization.




4

C l n a No. 1081
ae d r
94TH C O N G R E S S

1

V

1

rtSYlpi

H. R. 13955
[Report No. 94-1148]

I N T H E SENATE OF T H E U N I T E D STATES
JULY 28,1976
Read twice and referred to the Committee on Foreign Relations
AUGUST 10,1976
Reported by M r . SPARIOIAN, with amendments
[Omit the part struck through and insert the part printed in italic]

AN

ACT

To provide for amendment of the Bretton Woods Agreements
Act, and for other purposes.
1

Be it enacted by the Senate and House of Representa-

2

tives of the United States of America in Congress assembled,

3

That the Bretton Woods Agreements Act (22 U.S.C. 286-

4

286k-2) is amended by adding at the end thereof the fol-

5

lowing new sections:

6

"SEC. 24. The United States Governor of the Fund is

7

authorized to accept the amendments to the Articles of

8

Agreement of the Fund approved in resolution numbered

0

31-4 of the Board of Governors of the Fund.

10

"SEC. 25. The United States Governor of the Fund is

11 authorized to consent to an increase in the quota of the United




5

I

States in the Fund equivalent to 1,705 million Special Draw-

i> ing Rights.
3

"SEC. 26. The United States Governor of the Fund is

4 directed to vote against the establishment of a Council
5 authorized under Article X I I , Section 1 of the Fund ArtiG cles of Agreement as amended, if under any circumstances
7

the United States' vote in the Council would he less than

8

its weighted vote in the Fund.".

9
10

SEC. 2. Section 3 of the Bretton Woods Agreements Act
(22 U.S.C. 286a) shall be amended as follows:

II

(1) section 3 (c) shall be amended to read as fol-

12

lows:

13

" (c) Should the provisions of Schedule J) of the Ar-

il

tieles of Agreement of the Fund apply, the Governor of the

15 Fund shall also serve as councillor, shall designate an alter16 nate for the councillor, and may designate associates.":
(2) a new section 3 (d) shall be added to read as

17
18

follows:

19

" ( d ) No person shall be entitled to receive any salary

20

or

other compensation from the United States for services

21 as a Governor, executive director, councillor, alternate, or
22 associate.".
23

SEC. 3. The first sentence of section 5 of the Bretton

24 Woods Agreements Act (22 U.S.C. 286c) is amended to
25 read as follows: "Unless Congress by law authorizes such




6
3
1 action, neither the President nor any person or agency shall
2

on behalf of the United States (a) request or consent to any

3

change in the quota of the United States under article I I I ,

4

section 2 (a), of the Articles of Agreement, of the Fund; (b)

5

propose a par value for the United States dollar under para-

( graph 2, paragraph 4, or paragraph 10 of schedule. C of the
<
7

Articles of Agreement of the Fund; (c) propose any change

8

in the par value of the United States dollar under para-

0

graph 6 of schedule C of the Articles of Agreement of the

10 Fund, or approve any general change in par values under
11 paragraph 11 of schedule C; (d) subscribe to additipnal
12 shares of stock under article I I , section 3, of the Articles
13

of Agreement of the Bank; (e) accept any amendment

14 under article X X V I I I of the Articles of Agreement of the
15 Fund or article V I I I of the Articles of Agreement of the
16 Bank; (f) make any loan to the Fund or the Bank; (g)
17

approve the establishment of any additional trust fund

18

ivhereby resources of the International

19

would be used for the special benefit of a single member, or

Monetary

Fund

20 of a particular segment of the membership, of the Fund.".
21

SEC. 4. Section 14 of the Bretton Woods Agreements

22 Act is amended as follows:
23

(1) Immediately after "SEC. 14." insert

24

(2) At the end thereof add the following new sub-

25

section:




"(a)".

7
4
1

b) The President shall, upon the request of any com-

2 mittee of the Congress ivith legislative jurisdiction over an
3 international financial institution or economic organization
4 of which the United States is a member, transmit promptly
5

to such committee any appropriate information furnished to

(j any department or agency of the United States by such
7 institution or organization".
8

SEC. 4 5. The first sentence of section 17 (a) of the

9 Bretton Woods Agreements Act (22 U.S.C. 286e-2 (a)) is
10 amended to read as follows: " I n order to carry out the pur11 poses of the decision of January 5, 1962, of the Executive
12 Directors of the International Monetary Fund, the Secretary
13 of the Treasury is authorized to make loans, not to exceed
14 $2,000,000,000 outstanding at any one time, to the Fund
13 under article V I I , section 1 (i), of the Articles of Agreement
16 of the. F u n d " .
17

SEC, 6 6'. The Special Drawing Eights Act (22 U.S.C.

18 286n-r) is amended by:
19
20

(1) deleting "article X X I V " in section 3(a) and
inserting in lieu thereof "article X V I I I " ;

21

(2) deleting "article X X V I , article X X X , and arti-

22

cle X X X I " in section 3 ( b ) , wherever it appears, and

23

inserting in lieu thereof "article X X , article X X I V , and

24

article X X V " ;




8
5
1
2

(3) deleting "article X X I V " in section 6 and insorting in lieu thereof "article X V I I I " ;

:>

(4) deleting "article X X V I I ( b ) " in section 7 and

j

inserting in lieu thereof "article X X I ( b ) " .

R
}

SEC. % 7. Section 2 of the Par Value Modification Act

(r

(31 U.S.C. 449) is hereby repealed.

7

SEC. ? 8. Section 10(a) of the Gold Reserve Act of

8

1934 (31 U.S.C. 822a(a)) is amended to read as follows:

9

"SEC. 10. (a) The Secretary of the Treasury, with the

10 approval of the President, directly or through such agencies
11 as he may designate, is authorized, for the account of the
12 fund established in this section, to deal in gold and foreign
13 exchange and such other instruments of credit and securities
14

as he may deem necessary to and consistent with the United

15

States obligations in the International Monetary Fund. The

16

Secretaiy of the Treasury shall annually make a report on

17

the operations of the fund to the President and to the

18

Congress.".

19

SEC. $ 9. Section 14 (c) of the Gold Reserve Act of

20

1934 (31 U.S.C. 405b) is amended to read as follows:

21 "The Secretary of the Treasury is authorized to issue gold
22 certificates in such form and in such denominations as he
23 may determine, against any gold held by the United States
24 Treasury. The amount of gold certificates issued and out-




9
6
;

standing shall at no time exceed the value, at the legal stand-

2 ard provided in section 2 of the Par Value Modification Act
'»

(31

\

ment, of the gold so held against gold certificates.".

f>

U.S.C.

SEC. 0 10. The amendments made by sections 2, 3, 4j

(5 5, 6, 7 and
7

449) on the date of enactment of this amend-

8 of this Act shall become effective upon entry

into force of the amendments to the Articles of Agreement

8 of the International Monetary Fund approved in Resolution
V Numbered 31-4 of the Board of Governors of the Fund.
Passed the House of Representatives July 27, 1976.
Attest:




EDMUND L. HENSHAW,

JR.,
Clerk.

10

Calendar No. 10S1
9 4 T H CONGRESS

U Session

)

SENATE

F

REPORT

1

J

No. 94-1148

A M E N D M E N T OF T H E B R E T T O N WOODS AGREEMENTS
ACT

AUGUST

Mr.

SPARKMAN,

10,1976.—Ordered to be printed

from the Committee on Foreign Relations,
submitted the following

REPORT
[ T o accompany H . R . 13955]

The Committee on Foreign Relations, to which was referred the
b i l l (H.R. 13955) to provide for amendment of the Bretton Woods
Agreements A c t and for other purposes, having considered the same,
reports favorably thereon w i t h amendment ana recommends that the
b i l l as amended do pass.^
PURPOSE OF T H E

BILL

The purpose of the b i l l H.R. 13955 is threefold. First, the b i l l authorizes the U.S. Governor of the International Monetary F u n d
( I M F ) to sign for the United States the amended Articles of Agreement of the Fund. The new amendment I M F Articles of Agreement
are printed i n House of Representatives document no. 94-447. (The
corresponding pages of the old Articles of Agreement are printed on
the opposing pages of the House document.) Second, the b i l l authorizes an increase i n the United States quota to the I M F by 1,705 million Special Drawing Rights ( S D R ) or approximately $2 billion
w i t h the SDR valued at 1 SDR—$1.1GU.S. T h i r d , H.R. 13955 amends
three other acts of relevant financial legislation to reflect the changes
i n the amended I M F Articles of Agreement.
COST OF T H E

BILL

There are no budgetary implications i n this bill. The expansion of
the U.S. quota at the I M F is treated as an exchange of assets between
the Fund and the U.S. Government. Such an exchange must be authorized but not appropriated since there is no uncompensated expenditure
of fiscal resources.



11
2
HISTORICAL

BACKGROUND

The international monetary system as i t has been experienced over
the last three decades i n the creation of the Bretton Woods Conference i n 1944. The conference agreement was authorized by the United
States and the United Kingdom. The objective of the system was to
provide financial stability i n international markets. This was achieved
by fixing exchange rates, by setting an official price for gold, by guaranteeing the conversion into gold of major currencies, and by formi n g the I M F to oversee the system and provide i t w i t h the credit facilities to stabilize the currencies of countries having balance of trade
difficulties.
The dissolution of the monetary system created by the Bretton
Woods Agreements can be traced to the early 1960s. The monetary
system during this time period made a de facto transition from a
"gold standard" to a dollar standard. The continuing annual balance
of payments deficits of the United States, which were seen as a blessing i n the 1950s when the new post-war monetary system was starved
for liquidity, produced a dollar glut abroad by the early 1960s. There
were more dollars abroad than the U.S. had gold. The U.S. commitment to redeem international dollars for gold became a physical impossibility. The reality of dollar convertibility ended. The strength
of the dollar and the U.S. economy became the base for the system,
as major trading countries were forced to hold their international
monetary reserves in dollars.
Continuing U.S. balance of payments deficits through the 1960s
meant the U.S. was providing more monetary paper for the real resources i t bought from abroad. The dollar was overvalued i n relation
to other major currencies. The inflation generated by the Vietnam
W a r expenditures further accelerated both the flow of dollars abroad
and the overvaluation. However, during the-1960s, devaluation of the
dollar was not politically acceptable i n the United States nor desired
abroad by our trading partners. A number of actions during the 1960s
marked the U.S. efforts to help relieve pressures on the monetary system. The interest equalization tax ( I E T ) and regulations on capital
flows were instituted. M i l i t a r y offset agreements were negotiated.
Agreements were made between the largest 10 countries on gold holdings, the price of gold and foreign dollar holdings. A system of currency swap arrangements between the major central banks came into
being to help stem short-term speculative flows against major currencies. U.S. Export-Import Bank activities were expanded i n the
hopes of reducing the deficit and the domestic international sales
corporation ( D I S C ) authorized to further stimulate exports.
B y the late 1960s, major pressures were building for change. The
monetary system was not serving the objectives of major interest
groups. The Europeans became sensitive to U.S. purchases of European firms w i t h overvalued dollars. U.S. labor felt that jobs were being
shipped abroad at the same time that imports were competing easily
w i t h domestic production because of the overvalued dollar. U.S. exporters were losing overseas markets and finding i t difficult to compete w i t h European firms i n t h i r d country markets. Studies by the
O E C D (Organization for Economic Cooperation and Development)




12
3
began to show that under a fixed exchange rate system, the U.S. had
exported to Europe and the world its own inflation. The Europeans
argued that the dollar had two functions, one as a domestic currency
and one as an international currency. The United States was accused
continually of opting for domestic political considerations rather than
f u l f i l l i n g its international responsibilities as a reserve currency
country.
The system had been faltering f o r a decade, but the benchmark
date of the collapse is put at August 15,1971. O n this day, President
Nixon reversed U.S. international monetary policy by officially declaring the non-convertibility of the U.S. dollar into gold and unilaterally imposing a 10 percent surcharge on a l l imports. The latter
act represented a 10 percent devaluation of the dollar. The August 15
declaration led to the Smithsonian Agreement of December, 1971,
which realigned the exchange rates between the dollar and other
major currencies i n the world. As part of the agreement, the dollar
was devalued by 8 percent i n relation to gold, while such currencies
as the Deutscne mark and the Japanese yen were appreciated
substantially.
The Smithsonian Agreement was an attempt to hold together the
monetary system under the Bretton Woods structure of fixed exchange
rates and currencies denominated i n gold at official prices. B u t economic pressures i n the United States, i n the face of continuing balance
of payments deficits, forced the United States to unilaterally devalue
again by 10 percent i n January, 1973. This devaluation signaled the
end of the Smithsonian Agreement and the demise of the fixed rate
exchange of Bretton Woods. B y March of 1973, all of the major tradi n g nations, w i t h few exceptions, were floating their currencies and
allowing world exchange markets to set currency values. W h i l e sanctioned by the I M F , the float was i n technical violation o f the Bretton
Woods Agreements and the Articles of the International Monetary
Fund.
The 1973 float of currencies eventually ended I M F efforts to structure a new monetary system on the principle of fixed exchange rates.
The focus of reform was redirected to structuring a new system reflecting the realities of the floating rates. D u r i n g the summer of 1974,
the I n t e r i m Committee of the I M F was formed to negotiate this
change. The major industrialized countries are represented directly
on the Committee, w i t h other members of the I M F selecting representatives that each represent a group of countries. The representatives are of ministerial rank. The I n t e r i m Committee was set up w i t h
the basic idea that the finance ministers have the capacity to make the
political decisions necessary to reach the compromises needed to f o r m
a consensus on the shape of a new international monetary system.
There were three major issues facing the I n t e r i m Committee when
i t began negotiations i n September 1974. These three issues were: the
future role of gold i n the new monetary system, the changes i n the
I M F quota structure to reflect the changes i n economic wealth i n the
world, and the structure.of the exchange rate system i n the new monetary system.
The basic political compromise on the issue of gold was reached between the French and Americans at the bilateral summit meeting i n



13

4
Martinique, December, 1974. President F o r d met w i t h President Giscard d'Estaing, w i t h finance ministers W i l l i a m Simon and Jean-Pierre
Fourcade present. The agreement, accepted by the I n t e r i m Committee
i n August, 1975, abolished an official price for gold, allowed each nation to value its gold reserves at market price i f i t so wished, and
advocated the sale of I M F gold assets. I t seemed to indicate substant i a l withdrawal by the French f r o m their long-held position that gold
should remain central to the monetary system. Yet i t is argued by
some that the agreement may allow gold actually to come back into
the system i n the future. The United States advocates that the Special
Drawing Right ( S D R ) replace gold i n the system. The U.S. also
surfaced the proposal at Martinique that the I M F might sell a portion
of its gold, the profits from the sale being placed i n a fund to be used
by less developed countries to help w i t h special balance of payment
problems. This proposal evolved into the idea of the new I M F Trust
Fund.
The second question before the I n t e r i m Committee, that of changing quotas i n the I M F , was approved on August 31, 1975, at the
Committee's meeting i n Washington, D.C. I t was decided to expand
the total quotas of the I M F by one-third. Almost all countries w i l l
increase their quotas by an absolute amount but a limited number
of countries w i l l increase their quotas by a larger percentage than
others. This w i l l result i n a change i n the relative percentage of national participation i n the I M F . The most significant relative increase
i n participation was an expansion of the O P E C (oil-exporting) nations' percentage from 5 percent to 10 percent, w i t h the U.S. and
other O E C D nations reducing their cumulative percentage by 5
percent.
On the t h i r d issue—exchange rates—the main differences were between the French position advocating fixed rates and the American
position promoting floating rates. The issue was not resolved at the
September, 1975, I F M / I B R D meeting, but a consensus was reached
among the industrial countries that i f the French and the Americans
could solve their differences, the others would accept the compromise.
Accordingly, the U.S. took advantage of the opportunity to work w i t h
the French to design the foundation of the new international monetary
system. The d r a f t i n g was carried on i n relative secrecy u n t i l the
French-U.S. agreement surfaced at the November, 1975, economic
summit conference at Rambouillet, France. The other countries attending Rambouillet had no previous knowledge of the document,
although they were cognizant of the French-American negotiating
effort.
The negotiations began w i t h both countries committed to the same
objective, the reestablishment of stability i n the international monetary system. I t was the French belief that this stability could be imposed by the central governments. The Americans countered w i t h
the argument that the central governments did not have the resources
to stabilize the market without each economy reaching its own internal
equilibrium. The French came to accept this position.
The actual document still remain classified as secret. However, U.S.
Treasury Under Secretary for Monetary Affairs, E d w i n Yeo, I I I , dis76-795 0 - 76 - 2




14
8
cussed the contents of the document as follows before the Senate
Foreign Relations Committee on June 22, 1976:
The understandings at Rambouillet came i n two forms:
one, an agreement between the French government and ourselves which dealt w i t h our mutual perception of the shape
of international monetary reform. I n other words, we had a
number of points on which we had been unable to agree, and
the understanding dealt w i t h those disagreements.
The second aspect of the understanding of Rambouillet
involves, again between the French and ourselves, an agreement to collaborate to (sic) consult between Treasuries and
central banks regarding exchange rate developments—
specifically an agreement to counter disorderly market conditions, which has been our policy for some time.
The other participants at Rambouillet associated themselves
not w i t h the understanding per se, but w i t h the communique
which came out of that understanding . . .
While i t is publicly known that the agreement contained a working
d r a f t of the key compromise on a new Article I V of the I M F Articles
of Agreement, the second aspect of the Rambouillet Agreement mentioned by Under Secretary Yeo has received minimal public attention.
F r o m his statement, i t must be concluded that a process involving
national treasuries and central banks has been put into place to oversee
the management of the new monetary system. The Rambouillet Agreement, therefore, takes on a longer term significance than just a compromise on the issue of the structure of the exchange rate system.
The Rambouillet compromise on the structure of the exchange rate
system formally was accepted by the other members of the I M F at the
I n t e r i m Committee meeting in January, 1976, i n Kingston, Jamaica.
W i t h this key decision made, i t was possible for the Governors of the
F u n d to vote on resolutions expanding quotas and accepting the
amendments to the Articles of Agreement. The amended agreements
enter into force upon signature of three-fifths of the members having
four-fifths of the weighted voting power.
The Secretary of the Treasury, as U.S. Governor of the Fund, cast
a favorable vote on the quota resolution i n March, 1976, and a favorable vote on the amendment resolution i n A p r i l , 1976. These votes d i d
not constitute acceptance by the United States of the resolutions. Under
Section 5 of the Bretton Woods Agreements Act, Congressional
authorization is necessary prior to U.S. acceptance of amendments to
the Articles of Agreements or of the expansion of quotas. The necessary
legislation was transmitted to the Congress and introduced on May 19,
1976, i n the Senate as S. 3454 and on May 21, 1976 i n the House as
H.R. 13955.
COMMITTEE

ACTION

The b i l l to amend the Bretton Woods Agreements, S. 3454, was
introduced (by request) by Senator Sparkman on May 19, 1976. The
Committee held two days of hearings on S. 3454. On June 22,1976, the
Committee heard Under Secretary of the Treasury E d w i n H . Yeo I I I .
Senator Sparkman also introduced into the record a letter i n support




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6
of the b i l l on behalf of the Atlantic Council from former Secretary
of the Treasury Henry Fowler. On June 29, 1976, the Committee
invited a panel of three Brookings Institution economists to comment
on the implications of S. 3454: Edward R. Fried, W i l l i a m Cline and
P h i l i p H . Trezise. The Committee also took testimony from Eugene A .
Birnbaum, Vice President and Chief Economist of the First National
Bank of Chicago and Patrick M. Borman from the Institute for
Economic and Legal Analysis i n New York City. The Committee held
the record of the hearings open for two weeks for those parties who
wished to submit statements for the record. Statements were received
from Deputy Assistant Secretary of State for International Finance
and Development Paul H . Boeker and from I r v i n g S. Friedman from
Citibank of New Y o r k City.
On J u l y 27,1976, the House of Representatives passed H.R. 13955
by a vote of 289 yeas and 121 nays, and that b i l l was referred to the
Committee on Foreign Relations on the following day. The Committee took H.R. 13955 under consideration on August 3,1976. The staff
reviewed f o r the Committee the House amendments. These amendments are identified i n the section-by-section analysis of the bill. The
Committee had no objection to the House amendments except for one
technical point which was amended.
The technical amendment was made to Section 5 of the Bretton
Woods Agreements Act. Section 5 specifies certain actions which
neither the President nor any person or agency can take on behalf of
the United States unless authorized by Congress. The House amended
Section 5 by adding paragraph (g) which prohibits U.S. approval of
the establishment of any additional trust fund at the I M F which
would provide special benefits to a single member or group of members. This language limited the U.S. Governor from approving I M F
management of national trusts without Congressional approval. Such
services are authorized under Article V , Section 2(b) of the I M F
Articles of Agreement. The Committee amended this amendment by
inserting the phrase '^whereby resources of the International Monetary F u n d would be used." This phrase makes i t clear that the amendment deals w i t h I M F financial resources and not national or multinational resources being managed by the I M F on a contractual basis.
The amendment has the approval of the Department of the Treasury.
The Commitfee further amended H.R. 13955 on a motion by Senator
Charles Percy by inserting a new Section 4. Section 4 adds a new
subsection (b) to section 14 of the Bretton Woods Agreements A c t
which would require the President, upon the request of a Congressional committee w i t h proper jurisdiction, to transmit promptly to
such committee any "appropriate" information furnished to any
United States department or agency by any international financial
institution or economic organization of which the United States is
a member. The quoted word was an amendment to Senator Percy's
amendment and carries special significance as later noted.
The Committee believes that this amendment w i l l improve Congressional oversight w i t h regard to United States participation i n the
international monetary system. More effective oversight is required by
the change to floating exchange rates. I n the past, under the system
of par values or set rates, exchange management was carried out by




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7
means of controls over trade, financial flows, offset payments, and
other activities requiring Congressional approval. The move to floati n g rates has eliminated many such oversight tools, however, while at
the same time increasing the need f o r reliable information on how
well the new system is functioning. Growing economic interdependence has added to that need.
The provision also strengthens Congressional oversight over U n i t e d
States foreign economic policy. The staffs and secretariats of the international economic institutions and organizations produce significant economic research on national economies and international ecoomic issues which they distribute to their members. This information
is available to the Executive Branch and i t is the opinion of the Committee that i t should be available to the appropriate legislative committees of Congress.
The provision should not create constitutional difficulties. I t requires the transmittal only of "appropriate" information. I t would
not require the transmittal of confidential communications between
departments or agencies of the Executive Branch. Rather, i t relates
to information furnished the Executive Branch by external sources.
I n this regard, i t is roughly analogous, constitutionally, to the "Case
A c t " , which requires the transmittal to the Congress of international
agreements to which the United States is a party.
The Committee recognizes that there w i l l be cases where the appropriate information involved may be sensitive. B u t i t notes that
such information is now disseminated to 20 directors of the I M F
representing over 100 countries. Access to such information, most
Committee members believe, is essential for the proper performance
of legislative functions. Nothing i n this provision is to be construed
as l i m i t i n g any Committee's subpoena power.
A portion of Senator Percy's proposal which would have imposed
criminal penalties for unauthorized disclosure of sensitive information
was dropped because of uncertainty regarding its effect on activities
protected by the Speech or Debate Clause, Article I , Section 6, clause
1 of the Constitution. Such action was taken, however, without prejudice to consideration of a penalties provision on the Senate floor.
D u r i n g its consideration of this amendment, the Committee heard,
the testimony of M r . Sam Y . Cross, U.S. Executive Director of the
I M F . M r . Cross expressed concern over the amendment, especially the
transfer of highly sensitive economic information to Congress.
Thereafter, the Committee by voice vote and without dissent on
August 3 passed H.R. 13955 as amended and ordered i t reported favorably to the Senate.
S E C T I O N B Y SECTION A N A L Y S I S OF

H.R. 13955, AS

AMENDED

H.R. 13955 passed the House of Representatives on J u l y 27, 1976,
and was referred to the Senate on J u l y 28,1976. The bill—which replaces S. 3454—as amended i n the House and by the Committee on
Foreign Relations, has ten sections. The first five sections of H . R .
13955 amend the Bretton Woods Agreements Act, the next four sections amend other relevant legislation, and the last section deals w i t h
the date the amendment w i l l become effective.




17
8
The first section of H . R . 13955 amends the Bretton Woods Agreements A c t by adding Sections 24,25 and 26 to the Act. Section 24 is the
key section. I t authorizes the U.S. Governor of the International
Monetary Fund, the Secretary of the Treasury, to accept the amendments to the Articles of Agreement of the Fund. These amendments to
to Articles are contained i n the I M F Board of Governors resolution
31-4. I t is this document that contains the provisions that move the
exchange rate system from a fixed rate system to a floating rate system, substantially reduce the role of gold i n the international monetary system, expand the quotas of the Fund by 33.6 percent, establish
a Trust F u n d and more lenient access to the Fund's resources, and
modernize the operations of the F u n d to include authority to create a
F u n d Council. The Council would be composed of finance ministers
and would replace the current I n t e r i m Committee.
Section 25 specifically authorizes the increase i n the U.S. quota i n
the I M F . The increase is 1,705 million Special D r a w i n g Rights (SDR)
or approximately $2 billion. The S D R value is based on an average
daily value of 16 international currencies and fluctuates daily. Presently, the U.S. quota is S D R 6,700 or approximately $8 billion. The
U.S. quota expansion is less than the general one-third expansion of
the Fund's resources, therefore the U.S. percentage i n the Fund drops
from 22.93 percent to 21.53 percent. Roughly every five years since
1958-59, the Fund's resources have been increased to keep i n step w i t h
the growth of international monetary resources and trade. This onet h i r d increase is the fourth expansion.
Section 26 was added on the floor of the House of Representatives.
I t instructs the U.S. Governor to the I M F to vote against the formation of the new I M F Council i f the Council w i l l not follow the practice of weighted voting. Weighted voting provisions of the Fund are
stated i n Article X I I , Section 5, They apply to all organs of the F u n d
and all votes. The addition of Article 26 has the effect of expressing
the sentiment of the Congress that weighted voting i n the Council is
desirable.
Section 2 of H.R. 13955 was inserted by House Committee action
and amends Section 3 of the Bretton Woods Agreements Act. Section
3 deals w i t h the "Appointment of Governors, Executive Directors, and
Alternates." The amendment anticipates the formation of the I M F
Council by stipulating that i f the Council is formed, the U.S. Gover :
nor of the F u n d w i l l serve as Councilor and have the authority to
designate an alternate and associates. The second part of the amendments prohibits the Councilor, his alternate or associates from receiving salary or other compensation from the U.S. Government. This is
standard language for all U.S. legislation on international financial
institutions. The U.S. Secretary of the Treasury receives no compensation for representing the United States. The other positions are paid
by the institution. The provision prohibits double salary payments.
The t h i r d section is a House provision which amends Section 5 of
the original Act. Section 5 prohibits specific acts of the Executive
Branch without prior Congressional authorization. H.R. 13955 amends
Section 5 by adding p a r t ( g ) . P a r t (g) w i l l prohibit the U.S. Governor to vote f o r the establishment of any new trust funds at the I M F
without the prior approval of the Congress. The amendment reflects
House sentiment that the Trust Fund, w i t h its concessional lending




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9
to specified poor members, is an economic aid mechanism and past
U.S. Executive support f o r such a f u n d without the consent of Congress has been seen as a circumvention of Congressional authority.
Similar concerns have been expressed i n the U.S. Senate. The Committee on Foreign Relations amended the House amendment, inserti n g a technical phrase allowing the U.S. Governor to vote without
Congressional authority on trust funds that might be managed by
the I M F but would not include financial resources of the Fund. This
initiative is explained f u l l y i n the section of this report titled Committee Action.
The Committee amended H.R. 13955 to insert a new Section 4 and
consecutively renumbered House sections 4 through 9 to 5 through 10.
Section 4 amends Section 14 of the Bretton Woods Agreements A c t
by designating the present language of Section 14 as paragraph " (a) "
and adding a new paragraph lettered " ( b ) " . The new paragraph provides legislative authority f o r the committees of Congress w i t h legislative jurisdiction over international financial institutions or economic
organizations to request f r o m the President that he furnish any appropriate information provided by these institutions or organizations
to any department or agency of the United States Government. The
intent of the Committee i n amending the legislation i n this manner is
explained i n the section of this report entitled "Committee Action."
Section 5 of the bill, reflecting House Committee action, amends
Section 17(a) of the Bretton Woods Agreements Act. The section
deals w i t h U.S. obligations under the 1962 General Agreements to
Borrow. The amendment changes the I M F Article reference to the
appropriate paragraph i n the new I M F Articles. I t also deletes the
last sentence of 17 (a) which stated that any loan must take into consideration the U.S. balance of payments and reserve position. This
provision was logically consistent w i t h a fixed exchange rate system
where reserves were needed to defend the par value of the dollar. Under
a floating rate system, the reserves play a much smaller role i n the
adjustment mechanism.
Section 6, dealing w i t h amendments to the Special D r a w i n g Rights
Act, and Section 7, dealing w i t h the par Value Modification Act, contain a series of technical amendments that change appropriate references f r o m the old I M F Articles of Agreement to the new amended
Articles, or delete language that is inconsistent w i t h the new Articles.
Sections 8 and 9 reflect House amendments to the Gold Reserve
A c t of 1934. These are technical amendments, w i t h the exception of
the amendment of Section 10(a). Section 10(a) of the present A c t
authorizes the Secretary of the Treasury to use the resources o f the
Exchange Stabilization F u n d ( E S F ) " f o r the purposes of stabilizing
the exchange value of the dollar." The amendment deletes this language since under the amended I M F Articles of Agreement there is
no obligation to stabilize the dollar at a par value. The new language
directs the Secretary of the Treasury to use the E S F "as he may deem
necessary to and consistent w i t h the United States obligations i n the
International Monetary Fund."
Section 10 of the b i l i states that the amendments made i n Section 2,
3, 5, 6, 7, and 8 of the b i l l w i l l become effective upon entry into force
of the amendments to the I M F Articles of Agreement.




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10
I M P L I C A T I O N S OF T H E A M E N D M E N T S TO T H E B R E T T O N WOODS,
AGREEMENTS A C T

The amended Bretton Woods Agreements A c t authorizes the United
States Governor of the I M F to accept the amended I M F Articles of
Agreement and authorizes the expansion of the U.S. I M F quota. Authorizing these two actions w i l l have a broad impact i n five major
areas of the international monetary system: the exchange rate system,
the role of gold i n the system, the expansion of I M F quotas, the expansion of access to I M F resources, and the formation of the I M F
Council. I n discussing these five areas, i t is important to realize that
the amendments of the I M F Articles and the expansion of quotas were
negotiated as one package. The compromises which made this package
a reality took place over a two-year period. They were achieved among
the industrial nations, as well as between tfre industrial nations and
the developing countries. The package is the result of both economic
and political craftsmanship. I t is the opinion of the Committee that
the basic U.S. negotiating objectives were achieved and U.S. national
interests protected.
Exchange Rate System
O f all the changes i n the Fund, the agreement sanctioning the floating exchange rate system is the most significant. Moving to a floating
exchange rate f o r international commerce means that private enterprises and not the central governments bear the risk of currency fluctuations. I t also means that trade restrictions such as fixed tariff schedules are of less importance, since the exchange rate should compensate
to a degree f o r these impediments. Variable tariffs and non-tariff barriers w i l l remain as effective impediments to trade. I t is also felt by
some that floating rates w i l l complicate domestic monetary policy because interest rate changes may affect international capital flows
which, i n turn, w i l l affect exchange rate levels.
The negotiations on the exchange rate structure centered on how
the system would be managed, not whether the system would be managed. A fixed rate system is managed by direct government involvement i n the money markets, as well as by controlling certain items i n
the balance of payments that affect the demand and supply of a currency on foreign currency markets. A floating system is managed by
individuals i n the market responding to economic stimuli that influence decisions to buy or sell foreign currency. These incentives
register themselves through price or interest rates. I n the first case,
the central government provides guidance to the market. I n the second case, this guidance is provided by forces i n the market which encourage or inhibit economic activity. Adjustment takes place i n the
exchange rate and the national economy rather than through government regulation of trade or capital flows. Governments enter the foreign exchange market only to stabilize the market i n cases of erratic
fluctuations.
The exchange rate decision that is incorporated i n the amendment
to Article I V of the I M F charter is not a straightforward declaration.
The article i n fact allows f o r the simultaneous existence of numerous
systems of exchange rates. I t does not state that a floating system is




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11
authorized but implicitly states that the system presently i n force is
sanctioned. I t also states that on the vote of 85 percent of the members'
quotas, the I M F can return to a fixed exchange system. The agreement
allows coordinated floats such as the European "snake", as well as tied
floats where one currency is fixed to another that is floating. F o r example, Mexico coultf affix its currency to the dollar. I t s exchange rate
w i t h the dollar would remain constant while its exchange rate w i t h
other major currencies would float as these currencies floated against
the dollar. The wording very effectively allows all parties i n the proceeding to save face. I t s central importance f o r the U.S. position is
that the present floating system is sanctioned and the U.S. has veto
power over any move to adopt another system.
To help assure that governments do not secretly enter the foreign
exchange market to influence the exchange rate of national currencies,
the I M F members have accepted the following obligations. First, a l l
nations commit themselves to foster domestic economic policies which
assure reasonable price stability and which assure a monetary system
reasonably free of erratic disruptions. Secondly, all nations pledge
not to manipulate exchange rates other than short-term market action
to stabilize market disruptions. The success of the effort w i l l rely on
the integrity of the countries involved to live by the spirit of the
agreement.
The Role of Gold
The compromise on the future role of gold i n the monetary system
was reached, except for some decisions on beneficiaries of distributions, at the August 1975, I M F Interim Committee meeting. The decision was to remove gold from the international monetary system. I t
has long been reasoned that gold is not a good "numeraire" for the
system. There are many long dissertations on this issue, but the basic
argument is that the supply of gold is determined by factors outside
the monetary system. L i q u i d i t y i n relation to the needs of the system
is critical for its stable operation. I n the past, gold supply has not
kept pace w i t h the need for international liquidity. Furthermore, the
use of gold as a central part of the system favors those nations w i t h
large reserves, mainly South A f r i c a and the Soviet Union. F i n a l l y ,
there are competing uses for gold as a commodity, the demand f o r
which influences the structure of the monetary system—an influence
that is not seen as productive.
To remove gold from the international monetary system necessitated a decision on how to remove from the I M F its store of 150 million troy ounces which had been contributed to i t by member countries as part of their quota obligations. The decision was to sell this
gold. However, i t was realized that any massive sale of gold would
collapse the world gold market. The first two sections of the accord
set up a procedure for the I M F to divest itself of one-third of its goal
leaving two-thirds of the gold to be handled at some later date at the
discretion of the I M F .
The gold at the I M F is officially valued at SDR 35 or approximately
$42 per ounce. The present world price of gold is near $120 per ounce.
I t was decided that i n any distribution or sale of gold, the F u n d
would keep the figure of S D E 35 per ounce so that the I M F ' s assets




21
12
would not be depleted. The benefits to members from the redistribution
of I M F assets (described below) made the gold arrangement acceptable to promote a larger consensus.
The first part of the compromise is the restitution of one-sixth of
the I M F gold holdings to I M F members on the basis of their quotas
i n the Fund. The main beneficiaries of the restitution are the developed countries who hold the major portion of the Fund's quotas. This
restitution to the developed countries was seen as a quid pro quo to
France which has opposed for a long time the removal of gold from
the monetary system. The countries w i l l pay the I M F the official
price for the gold, $42.00, i n an exchange of assets. Should these
countries wish to sell this gold on the open market, they would realize
the profits.
The second part of the compromise deals w i t h the sale on the world
market of the second one-sixth of the I M F gold, the profits from this
sale to benefit the less developed countries. Sales of this gold have
already commenced and w i l l continue over the next four years. The
profits generated are to be placed i n a Trust Fund which w i l l provide
concessional lending to less developed countries who need loans for
balance of payments support. Although Treasury officials deny that
a five-year grace period and five years to repay. Those countries w i t h a
loan program that w i l l provide loans at one-half of one percent w i t h a
five-year grace period and five years to repay. Those countries w i t h a
per capita income of less than SDR 300 or approximately $350 w i l l
be eligible to use the Trust Fund. The Trust F u n d is to make about
$750 million available each year for the next four years. This figure
w i l l vary depending on the world market price of gold.
Another aspect of the sale of the second sixth of gold is referred to
as the "direct access" question. A number of F u n d members which
consider themselves less developed countries do not wish the profits
from the sale of their gold i n the F u n d given to other less developed
countries ( L D C ) . O f the 25,000 troy ounces to be sold, 7,000 or 28
percent is L D C gold. As part of the agreement on the second onesixth sale, seven twenty-fifths of the profit w i l l be given by quota
share directly to the less developed countries as their share of the
profits of the sale. Only eighteen twenty-fifths or 72 percent of the
profit w i l l go into the Trust Fund. This hidden restitution benefits
the more wealthy L D C s who have larger quota shares.
The t h i r d aspect of the gold compromise deals w i t h the role of gold
within the structure of the international monetary system. The agreement eliminates the official price for gold and the obligation of central
banks to use gold i n transactions between central banks or between
central banks and the Fund. To insure that no central bank moves
to hoard gold sold on the open market, i t is still illegal for a central
bank to purchase gold at more than SDR 35 per ounce. Furthermore,
the G - 1 0 1 adopted a set of rules to minimize the possibility of any
central bank not adhering to the agreement.
W h i l e i t is the expressed intent of the I M F to move gold out of
the international monetary system, there are vast numbers of legal and
psychological mechanisms still i n evidence i n the system that w i l l
1
Members of the G-10 are: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, U.K., and U.S., with Switzerland as an associate member in attendance.




22

13
perpetuate some role for gold. B y ending the practice of having a percentage of I M F quotas paid i n gold and eliminating gold transactions
between the F u n d and central banks, the F u n d has taken direct actions
to eliminate gold f r o m the system. However, as w i t h most institutional
acts, i t is the concurrence and sincerity of the daily actions of members
which w i l l determine the success of the effort.
The Expansion of Quotas
The expansion of the I M F quotas was agreed upon at the annual
I M F meeting i n Washington i n August, 1975. Quotas are the actual
exchanges of monetary assets by member states w i t h the I M F . These
assets represent the capitalization of the Fund. The U.S. has a claim
to its quota should the I M F ever be liquidated. These assets are " p u r chased" f r o m the I M F by member states f o r short-term balance of
payment needs. Present interest rates on these "purchases" are 4 to
6 percent w i t h maturities of 3 to 5 years.
A s a result of the agreement on expended quotas, assets held by
the I M F w i l l increase by $12 billion over the next two years. This represents an increase by one-third i n the Fund's resources. The actual
figures are denominated i n S D K s : SDR 29.2 billion rising to S D R 39
billion. This change w i l l be reflected i n an increase i n quotas of almost
all members of the Fund. The U.S. quota w i l l rise f r o m S D R 6.7 billion to SDR 8.405 billion. However, on a relative basis, some countries
w i l l expend their percentage of the I M F ' s total assets more than
others. The major shift w i l l be an increase i n the O P E C nation quotas
f r o m 5 percent of the F u n d to 10 percent. The United States and the
O E C D countries w i l l reduce their relative share to allow this expansion. The U.S. quota w i l l be reduced f r o m 22.93 to 21.53 percent.
This relative change i n percentage of the total assets w i l l shift national voting power i n the Fund. Votes i n the Fund are weighted i n
relation to quotas as a percentage of total assets. Each member receives
250 votes plus one vote for each 100,000 SDR of its quota. The drop i n
U.S. quota relative to the total assets w i l l reduce the U.S. voting share
f r o m 20.75 percent to 19.96 percent.
B y controlling 19.96 percent of the vote, the United States has veto
power over the important decisions i n the Fund. I n the past, important decisions of the Fund required an 80 percent majority. I n the
amended Articles of Agreement, this percentage has been raised to 85
percent. This change w i l l allow the United States a continuation of
its veto power even i f there are more relative shifts in the voting power
among F u n d members.
Expansion of Access to IMF Resowrces
As part of the broader compromise i n the negotiation, i t was agreed
to temporarily expand each of the four available credit tranches f r o m
25 percent to 36.25 percent of the quota. This expansion is designed
to allow temporarily more access to the Fund's resources. W i t h four
expanded tranches, a country can now "purchase" 145 percent of its
quota. This temporary expansion w i l l be i n effect u n t i l the new I M F
quotas are ratified. The conditions on each succeeding credit tranche
remains as they have been in the past. I n a system that is already
replete w i t h liquidity this agreement adds some inflationary pressure
to the total system. However, the $3 billion of new liquidity created




23

14
is only 1.5 percent of something more than $200 billion plus i n official
international reserves held by F u n d members.
The liberalization of the Compensatory Financing Facility ( C F F )
of the I M F is another measure designed to provide more access to the
Fund's resources. This was agreed upon i n December, 1974, and is
already operational. The Facility is for the use of members "facing
balance of payments difficulties arising from temporary shortfalls i n
export receipts resulting f r o m circumstances beyond their control."
The liberalization expands the use of the C F F f r o m 25 percent of
quota to 50 percent o i quota i n a 12-month period. The formula f o r
calculating shortfalls was also changed i n a manner that provides for
larger sums to be made available. "Purchases" from the C F F carry the
same interest rate and maturities as regular credit tranche "purchases",
but do not affect the members' access to other facilities of the I M F . I t
is estimated that this liberalization w i l l provide an extra $1 billion
for those qualifying.
The IMF Council
There are numerous technical changes in the amendments to the
I M F Articles designed to improve the operation of the I M F . The only
major institutional change included i n the amendments is an enabling
provision which would permit the Board of Governors, by an 85 percent majority vote, to create an I M F Council. The Council would be a
new, permanent organ of the I M F composed of members of ministerial
or equivalent rank. The Council is seen as a successor to the Interim
Committee. I t would provide the Fund w i t h a deliberative forum
whose members would have the political authority to make the decisions necessary to supervise and adopt the international monetary
system to changing circumstances. The authority to make these decisions would be delegated by the Board of Governors.
Summary
I n summary, the new quotas and the amended Articles of Agreement
are a pragmatic reform of the Bretton Woods Agreement of 1944. The
amendments, for the most part, sanction what already is being practiced. They authorized three major systemic reforms: a monetary adjustment process based on a floating exchange rate, the elimination of
gold, and a one-third expansion i n I M F quotas. They created for the
less developed countries some $3 to $4 billion i n new credits through
liberalization of the Compensatory Financing Facility, the Trust Fund
and a temporary expansion of drawing rights from the Fund.
The agreements do not guarantee a trouble-free system. Numerous
problem areas still remain. There must be close oversight of the system to guarantee national obligations are being fulfilled on exchange
rate performance as well as the role of gold. Control of international
liquidity has yet to be dealt w i t h effectively. Distribution of international reserves is badly skewed, causing a growth of international indebtedness and critical problems in access to international credit. Economic interdependence, fostered by an effective international monetary system, w i l l bring new problems for domestic and international
economic policy determinations. Finally, there is a great need to view
the monetary system as. an integral part of a larger whole, an inter-




24
15

national system of political economy. These are all issues i n which Congress must play an important part i n its oversight role i n respect to
United States foreign economic policy.
COMMITTEE

COMMENTS

The Committee believes that i t w i l l be difficult for the United States
Government to know whether the amended Articles of the I M F are
being adhered to by other members. Both of the key aspects of the
amended Articles of Agreement, the floating exchange rate and the
elimination of gold, depend on the good f a i t h of other nations to
operate w i t h i n the accepted commitments. Congress, not being directly
involved i n daily decisionmaking, w i l l have an even more difficult time
carrying out its assessment of the new system and U.S. policy toward
the system. Furthermore, the move from fixed to floating rates has
placed a much heavier emphasis on personal, monetary diplomacy.
The understandings reached through these diplomatic contacts w i l l
help determine the short-term objectives of international monetary
management. These short-term decisions w i l l come to define longerterm goals which w i l l encompass, by necessity, political and economic
considerations.
Therefore, the Committee expresses a strong desire to improve
formal and informal consultations on international monetary issues
w i t h the Department of Treasury and other departments and agencies.
Senator Clifford Case emphasized that such consultations must be
initiated, i n many instances, by the Executive Branch, since Congress
cannot know of all major decisions facing the Administration. I t is
the opinion of the Committee that the Executive Branch must be more
forthcoming i n its provision of information to Congress on the issues
and policy choices facing the United States i n international monetary
policy. W i t h o u t effective consultation and cooperation of this sort,
there can be little meaningful oversight by Congress i n this critical
policy area. For this reason, the Committee supports Senator Percy's
amendment, Section 4 of H.R. 13955, which provides legislative
authority for the request of information provided to the Executive
Branch by international financial institutions and economic
organizations.
One area that remains poorly defined is the role of the Federal
Reserve i n international monetary policy formation and implementation. The Committee informally asked the Federal Reserve Board to
send a Member to testify during the Committee's hearings. The Board
deferred to Treasury and d i d not appear. Yet Under Secretary of
Treasury E d w i n Yeo, during his testimony on June 22,1976, d i d state
that there is a recognized role for central banks outlined i n the
Rambouillet agreement. I t is the Committee's intention to carry out
its oversight role i n relation to the total operation of the international
monetary system and i t w i l l not l i m i t its interests to one department
or agency, or a limited number of more public forums.
The Committee strongly recommends the passage of this legislation
to legalize the status quo, to provide a new set of agreed operating
procedures, to institute a degree of flexibility i n the international




25

16
monetary system, and to promote world-wide economic growth and
interdependence. However, the Committee wishes to express caution
on the underlying assumption of the Administration that since a little
economic interdependence is good, a lot w i l l be much better. Interdependence has placed all the industrial democracies on the same
business cycle. The last major recession was deepened by this new
phenomenon. While the Committee recognizes the benefits of economic
integration, i t also recognizes the difficulties i n overseeing a system
that is as large and as complex as that now being created. I t suggests
that thought be given to what limits the United States wishes to
promote economic integration and that analyses be done as to the
potential costs and returns to the United States associated w i t h various
degrees of commitment to this concept.




26
CHANGES I N EXISTING

LAW

I n compliance w i t h paragraph 4 of Rule X X I X of the Standing
Rules of the Senate, changes i n existing law made by the h i l l , as reported, are shown as follows (existing law proposed to be omitted
is enclosed i n black brackets, new matter is printed i n italic, existing
law i n which no change is proposed is shown i n roman) :
*

BRETTON WOODS AGREEMENTS A C T
•
*
*
*
*

*

A P P O I N T M E N T OF GOVERNORS, E X E C U T I V E DIRECTORS, A N D A L T E R N A T E S

SEC. 3. (a) The President, by and w i t h the advice and consent of
the Senate, shall appoint a governor of the F u n d who shall also
serve as governor o f the Bank, and an executive director of the F u n d
and an executive director of the Bank. The executive directors so
appointed shall also serve as provisional executive directors of the
F u n d and the Bank for the purposes of the respective Articles of
Agreement. The term of office for the governor of the F u n d and of
the Bank shall be five years. The term of office f o r the executive
directors shall be two years, but the executive directors shall remain
i n office u n t i l their successors have been appointed.
(b) The President, by and w i t h the advice and consent of the
Senate, shall appoint an alternate for the governor of the F u n d and
an alternate for the governor of the Bank. The President, by and
w i t h the advice and consent of the Senate, shall appoint an alternate
f o r each of the executive directors. The alternate for each executive
director shall be appointed from among individuals recommended
to the President by the executive director. The terms of office for
alternates for the governor and the executive directors shall be the
same as the terms specified i n subsection (a) for the governor and
executive directors.
[ ( c ) No person shall be entitled to receivt any salary or other compensation f r o m the United States for services as a governor, executive
director, or alternate.]
(c) Should the provisions of Schedule D of the Articles of Agreement of the Fund apply, the governor of the Fund shall also serve as
councillor, shall designate an alternate for the cowrvcillor, and may
designate associates.
(d) No person shall be entitled to receive amy salary or other compensation from the United States for services as a governor, executive
director, councillor, alternate, or associate.
*

*

*

*

*

*

C E R T A I N ACTS NOT TO BE T A K E N W I T H O U T

*
AUTHORIZATION

SEC. 5. Unless Congress by law authorizes such action, neither the
President nor any person or agency shall on behalf of the United




(17)

27
18,
States (a) request or content to any change i n the quota of the United
States under article I I I , section 2 ( a ) , of the Articles of Agreement of
the F u n d ; (b) propose [ o r agree to any change i n the par value of the
United States dollar under article I Y , section 5, or article X X , section
4, of the Articles of Agreement of the Fund, or approve any general
change i n par values under article I V , section 7 ; (c) subscribe to additional shares of stock under article I I , section 3 of the Articles of
Agreement of the B a n k ; (d) accept any amendment under article
X V I I of the Articles of Agreement of the F u n d or article V I I I of the
Articles of Agreement of the B a n k ; (©) make any loan to the Fund or
the Bank.J a par value for the United States dollar wider paragraph
paragraph
or paragraph 10 of schedule C/)f the Articles of Agreement of the Fund; (c) propose any change in the par value of the
United States dollar under paragraph 6 of schedule C of the Articles
of Agreement of the Fund, or approve any aeneral change invar values umder paragraph 11 of schedule G; (a) subscribe to additional
shares of stock under article / / , section 3, of the Articles of Agreement
of the
of the Bank; (e) accept any amendment umder article XXVIII
Articles of Agreement of the Fund or article VIII of the Articles of
Agreement of the Bank; ( / ) make any loan to the Fund or the Bank;
(g) approve the establishment of any additional trust fund, whereby
resources of the International Monetary Fumd would be used for the
special benefit of a single member, or of a particular segment of the
membership, of ths Fund. Unless Congress by law authorizes such action, no governor or alternate appointed to represent the United States
shall vote for an increase of capital stock of the Bank umder article / / ,
section 2, of the Articles of Agreement of the Bank, if such increase
involves an increased subscription on the part of the United States.
*

*

*

*

*

*

*

FURTHER PROMOTION OP I N T E R N A T I O N A L ECONOMIC RELATIONS

SEC. 14. (a) I n the realization that additional measures of international economic cooperation are necessary to facilitate the expansion
and balanced growth of international trade and render most effective
the operations of the Fund and the Bank, i t is hereby declared to be
the policy of the United States to seek to b r i n g about further agreement and cooperation among nations and international bodies, as soon
as possible, on ways and means which w i l l best reduce obstacles to and
restrictions upon international trade, eliminate unfair trade practices,
promote mutually advantageous commercial relations, and otherwise
facilitate the expansion and balanced growth of international trade
and promote the stability of international economic relations. I n considering the policies of the United States i n foreign lending and the
policies of the F u n d and the Bank, particularly i n conducting exchange transactions, the Council and the United States representatives on the F u n d and the Bank shall give careful consideration to
the progress which has been made i n achieving such agreement and
cooperation.
(6) The President shall, upon the request of any committee of the
Congress with legislative jurisdiction over an international
financial
institution or economic organization of which the Umted States is a
member, transmit promptly to such committee any appropriate in-




28

19
formation furnished to any department or agency of the United States
by such institution or organization.
*

*

*

*

*

*

*

SEC. 17. (a) I n order to carry out the purposes of the decision of
January 5,1962, of the Executive Directors of the International Monetary Fund, the Secretary of the Treasury is authorized to make loans,
not to exceed $2,000,000,000 outstanding at any one time, to the F u n d
under article V I I , section [ 2 ( i ) ]
of the Articles of Agreement of
the Fund. A n y loan under the authority granted i n this subsection shall
be made w i t h due regard to the present and prospective balance of
payments and reserve position of the United States.
(b) For the purpose of making loans to the International Monetary F u n d pursuant to this section, there is hereby authorized to be
appropriated $2,000,000,000, to remain available u n t i l expended to
meet calls by the International Monetary Fund. A n y payments made
to the United States by the International Monetary F u n d as a repayment on account of the principal of a loan made under this section
shall continue to be available for loans to the International Monetarv
Fund.
(c) Payments of interest and charges to the United States on account of any loan to the International Monetary F u n d shall be covered into the Treasury as miscellaneous receipts. I n addition to the
amount authorized i n subsection ( b ) , there is hereby authorized to be
appropriated such amounts as may be necessary for the payment of
charges i n connection w i t h any purchases of currencies or gold by the
United States from the International Monetary Fund.
*

*

*

*

*

*

*

SEC. 24- The United States Governor of the> Fund is authorized
to accept the amendments to the Articles of Agreement of the Fund
approved in resolution numbered 31-/+ of the Board of Governors of
the Fund.
SEC. 25. The United States Governor of the Fumd is authorized
to consent to an increase in the quota of the- United States in the Fumd
equivalent to 1,705 million Special Drawing Rights.

SPECIAL D R A W I N G RIGHTS

ACT

A N A C T TO provide for United States participation in the facility based on
Special Drawing Rights in the International Monetary Fund, and for other
purposes
*

*

*

*

*

*

*

SEC. 3. (a) Special D r a w i n g Rights allocated to the United States
pursuant to article [ X X I V ] XVIII
of the Articles of Agreement of
the Fund, and Special D r a w i n g Rights otherwise acquired by the
United States, shall be credited to the account of, and administered
as part of, the Exchange Stabilization F u n d established by section 10
of the Gold Reserve Act of 1934, as amended (31 U.S.C. 822a).
(b) The proceeds resulting f r o m the use of Special D r a w i n g Rights
by the United States, and payments of interest to the United States
pursuant to [article X X V I , article X X X , and article X X X I ]
article XX, article XXIV, and article XXV of the Articles of Agree-




29
20
ment of the Fund, shall be deposited i n the Exchange Stabilization
Fund. Currency payments by tne United States i n return f o r Special
Drawing Rights, and payments of charges or assessments pursuant to
[article X X V I , article X X X , and articie X X X I ] article XX, article
XXIV, and article XXV of the Articles of Agreement of the Fund,
shall be made f r o m the resources of the Exchange Stabilization Fund.
•
•
•
•
•
•
*
SEC. 6. Unless Congress by law authorizes such action, neither the
President nor any person or agency shall on behalf of the United
States vote to allocate i n each basic period Special Drawing Rights
under article [ X X I V ] XVIII^
sections 2 and 3, of the Articles of
Agreement of the F u n d so that allocations to the United States i n
that period exceed an amount equal to the United States quota i n the
Fund as authorized under the Bretton Woods Agreements Act.
SEC. 7. The provisions of article [ X X V I I ( b ) ] XXI(b)
of the
Articles of Agreement of the Fund shall have f u l l force and effect i n
the United States and its territories and possessions when the United
States becomes a participant i n the special drawing account.

P A R V A L U E MODIFICATION A C T
A N ACT To provide for a modification in the par value of the dollar, and for
other purposes

Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. This A c t may be cited as the " P a r Value Modification
Act".
[SEC. 2. The Secretary of the Treasury is hereby authorized and
directed to take the steps necessary to establish a new par value of the
dollar of $1 equals one thirty-eighth of a fine troy ounce of gold. When
established such par value shall be the legal standard for defining the
relationship of the dollar to gold for the purpose of issuing g o l d certificates pursuant to section 14(c) of the Gold Reserve A c t of 1934
(31 U . S . C . 405b).]
SEC. 3. The Secretary of the Treasury is authorized and directed to
maintain the value i n terms of gold of the holdings of United States
dollars of the International Monetary Fund, the International Bank
for Reconstruction and Development, the Inter-American Development Bank, the International Development Association, and the Asian
Development Bank to the extent provided i n the articles of agreement of such institutions. There is hereby authorized to be appropriated, to remain available u n t i l expended, such amounts as may be
necessary to provide for such maintenance of value.
SEC. 4. The increase i n the value of the gold held by the United
States (including the gold held as security for gold certificates) resulting from the change i n the par value of the dollar authorized by section 2 of this A c t shall be covered into the Treasury as a miscellaneous
receipt.
SEC. 5. I t is the sense of the Congress that the President shall take
all appropriate action to expedite realization of the international
monetary reform noted at the Smithsonian on December 18,1971.
76-795 0 - 76 - 3




30
. >

21
GOLD EESERVE A C T OF 1 9 3 4

A N A C T To protect the currency of the United States, to provide for the better
use of the monetary gold stock of the United States, and for other purposes
*
*
*
*
*
•
*

SEC. 10. (a) [ F o r the purpose of stabilizing the exchange value of
the dollar, t h e ] The Secretary of the Treasury, w i t h the approval of
the President, directly or through such agencies as he may designate, is
authorized, for the account of the fund established i n this section,
to deal i n gold and foreign exchange and such other instruments of
credit and securities as he may deem necessary to [ c a r r y out the purpose of this section. A n annual audit of such fund shall be made and
a report thereof submitted to the President] and consistent with, the
United States obligations in the International Monetary Fund. The
Secretary of the Treasury shall annually make a report on the operations of the fund to the President cmd to the Congress.
(b) T o enable the Secretary of the Treasury to carry out the provisions of this section there is hereby appropriated, out of the
receipts which are directed to be covered into the Treasury under
section 7 hereof, the sum of $2,000,000,000, which sum when available
shall be deposited w i t h the Treasurer of the United States i n a stabilization f u n d (hereinafter called the " f u n d " ) under the exclusive
control of the Secretary of the Treasury, w i t h the approval of the
President, whose decisions shall be final and not be subject to review
by any other officer of the United States. The fund shall be available
for expenditure, under the direction of the Secretary of the Treasury
and i n his discretion, for any purpose i n connection w i t h carrying
out the provisions of this section, including the investment and reinvestment i n direct obligations of the United States of any portions
of the f u n d which the Secretary of the Treasury, w i t h the approval
of the President, may f r o m time to time determine are not currently
required for stabilizing the exchange value of the dollar. The proceeds of all sales and investments and all earnings and interest accruing under the operations of this section shall be paid into the f u n d
and shall be available for the purposes of the fund.
(c) A l l the powers conferred by this section shall expire two years
after the date of enactment of this Act, unless the President shall
sooner declare the existing emergency ended and the operation of the
stabilization f u n d terminated; but the President may extend such
period f o r not more than one additional year after such date by proclamation recognizing the continuance of such emergency.
*

*

*

*

*

*

14. (a) * * *
*
*
*

*

*

*

*

*

SEC.

(c) The Secretary of the Treasury is authorized to issue gold
certificates i n such form and i n such denominations as he may determine, against any gold held by the [Treasurer of t h e ] United States
Treasury. The amount of gold certificates issued and outstanding shall
at no time exceed the value, at the legal standard provided in section
2 of the Par Value Modification Act (SI U.S.O. 449) on the date of
enactment of this amendment, of the gold so held against gold
certificates.




31
Senator P E R C Y . I have w i t h me D r . Charles Meissner, member of
the staff of the Foreign Relations Committee. I am not here to testify
on the f u l l scope of H.R. 13955. I do strongly support its passage as
passed by the House and reported by the Senate Foreign Relations
Committee.
I agree w i t h the committee's conclusion that i n renegotiating the
Bretton Woods Agreement the administration has achieved U.S. objectives and effectively protected U.S. interests.
M y purpose i n appearing this morning is not to speak as an advocate for H.R. 13955, but to explain to you the purpose and thought
behind my own amendment to H.R. 13955. The amendment appears as
section 4 i n the b i l l and amends section 14 of the Bretton Woods
Agreements A c t by adding a paragraph (b). The amendment is short
but very significant. I t reads as follows:
The President shall, upon the request of any committee of the Congress with
legislative jurisdiction over an international financial institution or economic
organization of which the United States is a member, transmit promptly to such
committee any appropriate information furnished to any department or agency
of the United States by such institution or organization.

The purpose of the amendment is to improve the potential of congressional oversight of U.S. governmental activities regarding U.S.
participation i n the international monetary system and U.S. foreign
economic policy.
For example, the Senate Foreign Relations Committee had two staff
members who were i n and out of Vietnam a great deal t r y i n g to assess
the situation there and t r y i n g to determine the need for another $700
million aid program.
The administration furnished information to the committee, but
i t was the committee's understanding that the I M F had an assessment
of Vietnam and its economic outlook that differed somewhat from the
administration point of view.
This I M F report was available and i t was i n the administration's
hands. The committee wanted access to that information. I t was given
to the U.S. Government.
The executive branch had it. We couldn't get it. We wanted to
analyze and study those differences i n appraisal of the situation. They
just invoked executive prerogative. I t was never officially given to
the committee. We had one other more recent illustration where Senator Humphrey's Subcommittee on Foreign A i d was analyzing the
debtf structure of LDC's i n relationship to the energy crisis; what their
cash position was, what their balance-of-payment deficit might be, and
how these figures related to their current and future needs for energy.
The I M F had an analysis and study of the less developed countries
on this issue. Our own Treasury Department did as well. They differed
considerably. The committee commissioned the Congressional Research Service to do this study. The I M F furnished the report directly
to the CRS upon its request. However, the Treasury intervened and
said the material could not be used publicly. This was the material
that the I M F had released to the CRS, that i M F had furnished to us.
I t took 6 months of negotiations to finally get that report material
printed. B u t during this time we couldn't have open debate on this
material.
I don't think Congress, when i t has an oversight responsibility, when
it is asked to appropriate huge sums of money, when i t is asked to




32
establish policy i n laying out programs, should be i n the position of
begging for information and have the cloak of confidentiality or
executive privilege thrown over it. When i t is an I M F agency, fianced i n part by ourselves, and any of these agencies, where we
contribute, the Congress and the executive branch should have equal
access.
Y o u can't say that Congress can't handle matters confidentially.
We handle things confidentially all the time. I don't deny that there
have been security leaks from Congress. There is leakage i n the Congress, occasionally. There is just as much leakage on the other side of
the fence downtown. We certainly didn't give the "deep backgrounders" attributed only to a high government official.
I simply do not see how we can operate and do our work, i f we are
deprived of this material.
The reason we direct this amendment to the President is that both
the Secretary of State and the Secretary of the Treasury participate
as lead representatives i n certain of our international economic organizations and institutions. Therefore, we direct i t to the President,
simply because we don't want to direct i t separately to several Cabinet
heads.
I have given the arguments i n my statement. They are contained
also i n the committee report. We had a thorough discussion of this
i n the Foreign Relations Committee.
One aspect of i t that would be particularly interesting, I think, to
this particular subcommittee is the necessity i n our oversight responsibilities of adjusting to new conditions i n international economic
relations.
The international monetary system and the International Monetary
F u n d ( I M F ) as the central institution of that system, f o r m the
cornerstone of U.S. foreign economic policy. Yet the switch f r o m fixed
to floating exchange rates limits congressional access to the policy
process associated both the monetary system and the I M F . W i t h fixed
exchange rates, adjustments i n the balance of payments were handled
through controls on trade, financial flows, military offset payments,
and so forth. Congress had to approve these actions and could express
its policy concerns.
However, under floating rates the adjustment process takes place i n
the rate itself, i n the marketplace w i t h no congressional input. The
system w i l l be r u n through the I M F and the financial organizations
of the O E C D and G-10. Without some access to the papers and
analyses of these bodies, congressional oversight of the new Bretton
Woods Agreements w i l l be minimal.
Second, because of the expanding role of economics, there is a growi n g need by Congress for international economic information. One
major center of reliable economic data is the staff and secretariats of
international financial institutions and economic organizations. The
executive branch uses this material i n the formulation of policy on
both bilateral and multilateral economic problems. I believe Congress
should also have access to this economic information, i f we are going
to review policy options intelligently.
Some years ago, I put a b i l l i n to create a full-time Undersecretary
of State for Economic Affairs. Previously the one Undersecretary
alternated between political and economic issues. Anyone today would
realize that economics is a full-time job and full-time responsibility.




33
We now have such a position. I t was filled first by Chuck Robinson,
who is now the Deputy Secretary.
Increasingly, our committee and this committee, are working on
foreign economic policy matters. We shouldn't have to be i n a position of going to friends i n various agencies, a friend i n the State Department, a friend at I M F , to t r y to get this k i n d of information.
We can't be expected to exercise our oversight, i f we are deprived
of the very k i n d of information needed to perform that function.
Ultimately, when we battle, we w i n the battle. We get the information, •somehow or other. B u t we just simply shouldn't be put i n the
position where we are reqiured to go after i t i n demeaning ways. I
should say, and also, i f i t is put i n the statute and transmitted to us
officially, we are officially held accountable for i t , as we are other
matters.
I would point out the Treasury Department opposed this amendment as they have officially opposed giving us access to this kind of
material. B u t I simply disagree, respectfully, w i t h the Treasury
Department's position on this, and I think i t is about time the Congress is treated as a f u l l partner i n these international economic
matters.
I would like to point out that one word was added to the amendment by Senator Javits. I n my original amendment I did not have
the words "appropriate information."
He wisely added the word "appropriate," which was accepted unanimously on the basis that there is enough vagueness about "appropriate," that i f there is a real argument by the Treasury Department or
State Department, that something is so highly sensitive that i t would
do damage, then they can argue that i t is not appropriate. Also i n the
case that a committee goes on a fishing t r i p and goes beyond its jurisdiction, then certainly you could say that the word "appropriate"
means only those things absolutely essential and necessary.
So, w i t h the balance of my statement i n the record, M r . Chairman,
I would urge acceptance by the Banking Committee of this amendment which was unanimously approved by the Foreign Relations
Committee.
Senator STEVENSON. Thank you Senator Percy.
F o r myself, I think you make very good points.
I had two questions, both of which are somewhat technical i n nature.
One you have just addressed yourself to, and that was the word
"appropriate." I n the last analysis, i t would be the executive branch
which determined what was appropriate, would i t not?
Senator PERCY. Well, i n that they possess the documents; and we
would be t r y i n g to get them; yes, they can argue i t is not appropriate.
Therefore, the burden of proof would be on us to prove that i t is
appropriate.
I think i t would remove 95 percent, or more, of the disagreements
we have had over a period of years as to whether the Congress of the
United States has the right to have documents that are prepared. A n d
we must remind ourselves these documents are furnished to all other
member nations.
I f they are saying we can't maintain security, they have to take into
account there may be 100 copies of these i n the hands of other governments. Each government can decide where those documents go. We
have no idea where they are i n all of these other countries.




34
Here is the ludicrous part of it. They say that we can't be trusted
to see a document. B u t finally, after argument, they agree you can see
one of the documents but they w i l l put i t i n a way we a l l recognize.
They say we can't let i t out of our hands, so we w i l l come u p and bring
i t up to you and sit there while you read it.
That, to me, is a really demeaning position for a member of the
U.S. Senate to be put in, to stand there, to have someone standing
there while a Senator is reading a document. They let h i m see the
information but won't trust the Congress of the United States to have
that document while the exact same document may be i n the files of 50
other countries. I don't know how many copies might be scattered
around the executive branch of our own Government.
I t h i n k i t is just time we stopped that k i n d of foolishness and be
looked upon as f u l l partners w i t h a f u l l oversight responsibility that
can't be exercised unless we have information.
Senator STEVENSON. Thp other question I had is about the reference
to ajiy committee of Congress w i t h legislative jurisdiction over an
international institution. A s you well know, especially f o r a member
of this committee, the Banking Committee, generally speaking, has
jurisdiction over monetary matters. I t has jurisdiction, generally
speaking, of the Federal Reserve Board.
I t might be argued, however, that that reference to a committee
w i t h legislative jurisdiction over international financial institutions
would exclude the Banking Committee and refer, instead, and exclusively, to the Committee on Foreign Relations.
W h a t is the intention? I s i t the intention to exclude the Banking
Committee? W o u l d there be some objection to language, at least
report language, i f not statutory, to make i t clear that the accountability lies not only to the Foreign Relations Committee, but also to
the committee w i t h general jurisdiction over monetary matters,
namely, the Banking Committee ?
Senator P E R C Y . I t would not, i n any way, expand the jurisdiction
of any committee. I t is not intended to alter that whatsoever.
Senator STEVENSON. Well, that is not exactly my question.
A n d I recognize, also, that the jurisdictions are a ibit confused at
the moment. As a matter of fact, I have the responsibility as chairman of the committee on reorganization of the committee system to
do something about the jurisdictions o f the Senate committees.
A t one point, before I came to the Senate, this committee had clearly
the jurisdiction over the I M F . That was when Senator F u l b r i g h t
was a member o f the committee.
B u t by some device or other, he took i t w i t h h i m to the Foreign
Relations Committee.
I am not suggesting that jurisdiction of any committee, including
this committee, be enlarged. I am suggesting that i t is very difficult
for the Congress to exercise responsibly its oversight responsibility for
money, monetary affairs generally, is to be artificially divided between
committees; one, because i t has a jurisdiction surreptitiously acquired
over international financial institutions, and another committee which
has general jurisdiction over monetary institutions.
Senator P E R C Y . Obviously, I t h i n k i f the Bretton Woods Agreement
is referred to the Foreign Relations Committee and the Banking Committee, then there is joint jurisdiction.
Senator T O W E R . The bottom line is, we want a piece of the action.




35
Senator PERCY. As I understand i t , that has been established and
settled; you have it.
We are simply saying, when both committees have concurrent jurisdiction i n an area, both committees ought to have access. I f there is a
clear area where one committee has jurisdiqtion, then that committee
and that committee only would have a right to ask for appropriate
information, i n order to function and carry out its oversight responsibilities.
Senator STEVENSON. Senator Proxmire.
Senator PROXMIRE. There is one part of the amendment that concerns
me.
I want to congratulate you, Senator, on what you have done. Absent
your amendment, there would be no access by any Member of Congress, as I understand it. I t is a positive step I believe all of us can
join you i n supporting.
I believe you said that was adopted unanimously:
Senator PERCY. That's right, w i t h the addition of that one word,
which I accepted immediately, because I saw the wisdom of it.
Senator PROXMIRE. I t does appear the way this is worded that this
committee would be excluded, and I think that would be a mistake.
Senator Stevenson has stated the case; this is the credit committee of
Congress; we do have responsibility w i t h respect to monetary policy.
Dollar value of gold, for instance, we have the jurisdiction to inspect the export-import and Export Administration Act.
I think the Congress would be better served i f i t were made clear,
somehow, we could add an amendment making i t clear we could have
jurisdiction whenever, as you say, the leigslation would be jointly
referred, could be referred to us.
I would agree we don't want to act i n this particular b i l l to change
jurisdiction. Shouldn't do it.
Senator Stevenson is on the committee. A r e you chairman of the
committee?
Senator STEVENSON. Yes.
Senator PROXMIRE. H i s subcommittee is responsible for determining
jurisdiction, recommending at least a change i n jurisdiction.
Senator PERCY. I would have no objection at all and would support
language that would make i t clear that, when concurrent jurisdiction
exists, that both committees should have access.
Senator PROXMIRE. Y O U wouldn't object to that?
Senator PERCY. I have no objection to that at all. The f u l l intent
and purpose of the amendment is to legislatively establish the right of
congressional access to information provided to the executive branch
by these international economic organizations and institutions.
Senator STEVENSON. Senator Tower.
Senator TOWER. I have no questions, M r . Chairman.
I ask unanimous consent that my opening statement be inserted prior
to the testimony of the Senator from Illinois.
Senator STEVENSON. Without objection.
Senator Helms.
Senator H E L M S . N O questions.
Senator STEVENSON. Thank you, Senator Percy.
We do have a vote. I n fact, we have two votes.
So the committee w i l l recess until we can vote.
[Recess.]




36
Senator STEVENSON. The next witnesses w i l l comprise a panel, and
i t includes two colleagues from the other body, from the House of
Representatives, Congressman Ron Paul and Congressman Tom Rees.
Do you gentlemen want to go first? You probably have schedule
problems.
STATEMENT OF THOMAS BEES, REPRESENTATIVE I N CONGRESS
FROM THE STATE OF CALIFORNIA
M r . REES. We appreciate that Mr. Chairman. I w i l l keep my statement mercifully short. I did want to testify for a short period as I was
the sponsor of the legislation.
Senator STEVENSON. Congressman Rees.
M r . REES. Thank you, Senator.
The legislation was approved by the House of Representatives by
a vote of 289 to 121. I t authorizes the U.S. Rperesentative to the I M F
to vote i n favor of the proposed changes that were agreed to at the
Jamaica Conference.
I t also authorizes an increase of the U.S. quota by 1.705 SDR's,
which is around $2 billion. This is not an appropriation. I t is a call
and i f the money is called by the I M F i t is really an exchange of assets
and gives the United States a draw on a hard currency, so that i t is not
an appropriation.
The overall quota increase was about 30 percent. There was a change
i n terms of percentages. The U.S. percentage went down and the percentage of the OPEC countries went up i n terms of what thev are
putting i n as quotas.
Our share dropped from 20.75 percent to 19.96 percent. We also
changed the rules so that any change of the I M F agreements has to be
made by an 85-percent vote of the members which gives the United
States the power to veto any change.
The most important thing as far as I am concerned, and I am concerned because I was an exporter by profession, is that we legitimize
the float.
As you know, we had a fixed system of parities under the original
Bretton Woods Act. But because of pressure on the dollar, the dollar
was floated several years ago.
The problem w i t h a fixed dollar was that the dollar was over valued.
I t was estimated by economists from the Brookings Institute that the
over valuation of the dollar probably resulted i n a loss of up to 750,000
jobs i n the United States because our exports were over valued and
the imports were undervalued.
Because of this terrible pressure on the U.S. economy, I think i t was
absolutely necessary to float the dollar. This legitimizes the float.
But even more than that, i t w i l l set up some ground rules on the
float.
The chairman of the Banking Committee i n the House, M r . Reuss,
gave a speech on the floor yesterday stating that the Japanese had been
purchasing dollars i n order to keep the dollar high, vis-a-vis the yen
so that Japanese exports would be undervalued and more able to
penetrate the export market.
We have to pass this legislation to legitimize what we are already
doing because then and only then can we set down the ground rules
that are necessary to see that the float is a legitimate float and is not




37
an illegitimate float where one currency is manipulated to keep i t
undervalued.
There has been a great deal of discussion recently about the I M F
auctions o f gold. The I M F is auctioning off around 750,000 ounces of
gold every 6 weeks.
These profits are put into a trust fund. The purpose of the trust
fund is to make loans to the poorest countries, that have a G N P of
$200 per capita per person.
This b i l l has nothing to do w i t h that. What the I M F is doing now
is what they can legally do under the present Bretton Woods Agreement. So this has no relationship to the sale of gold by the I M F .
Many people get the two subjects confused, but under the present
I M F rules what the I M F is doing now, selling its gold, w i t h the proceeds to be used for the trust fund, is perfectly legal.
I could go on into some of the technicalities of the bill, but I suspect
that you might have some questions.
I would be very happy to answer them.
Senator STEVENSON. Congressman Rees, thank you, not only for
appearing here this morning but for all your efforts i n the other body.
Just one question from me w i t h respect to your reference to other
trust funds. Doesn't this legislation prohibit the establishment of any
additional trust fund whereby resources of the International Monetary Fund would be used for the special benefit of a single member,
et cetera, isn't that, that provision, section 5, basically i t strikes me as
inconsistent w i t h what you just said about the establishment of additional trust funds.
M r . REES. Well, the trust fund that now exists now exists.
I t was felt by the Banking Committee that Congress should approve further trust funds. I t d i d not refer to the trust fund that
already exists.
The language is section G, that unless Congress by law authorizes
such action, the U.S. representative w i l l not approve the establishment
of any additional trust funds for the special benefit of a single member or a particular segment of membership of the fund.
So that i f there were a proposal to create another trust fund, that
would first have to be approved by Congress, authorizing our representative to the I M F to vote for it.
Senator STEVENSON. Could additional resources of the I M F be allocated to existing trust funds without congressional approval under
this language?
M r . REES. Under this language, the I M F can continue to sell gold
i n the open market and use the proceeds for that specific trust fund.
I seriously doubt i f the I M F could take their other assets, for
example, the quota money, and put that into the trust fund.
I think that would take an 85-percent vote of the members.
Senator STEVENSON. Y O U can't sell more than what is it, one-third
of the gold?
M r . REES. Yes; I think that the purpose of the trust fund was to
take care of some very serious balance-of-payments problems that now
exist for the poorest countries who have been so severely h i t by the
400-percent increase i n the cost of petroleum.
I would suspect that the attitude of the I M F is that this is really
a. temporary problem that w i l l exist maybe for 4 or 5 years, and that




38
by then we should come up w i t h different approaches to handling the
balance-of-payments problems of the very poorest countries.
I know that the I M F has been discussing this problem and they
would like to set some long-term permanent solutions.
This really, I think, is regarded as a temporary solution to take
care of one problem which was the run-up i n the cost of petroleum.
Senator STEVENSON. Senator Proxmire?
Senator PROXMIRE. M r . Rees, I j o i n Senator Stevenson i n congratulating you on the work you have done on this and especially congratulate you on the way you have presented this this morning.
Y o u have a marvelous knack of making complicated matters simple
and also making matters that seem k i n d of irrelevant to the important
activities of our l i f e very relevant to them.
M r . REES. T h a n k you.

Senator PROXMIRE. What I am concerned about, however, is a couple
of things.
No. 1, you said that this shouldn't be i n the budget because i t is an
exchange of assets.
O f course, there are all kinds of things that are exchanges of assets
that are put i n the budget. When we exchange cash for mortgages, we require that to be listed
as an expenditure, and has a budget effect and has to go through the
appropriations process.
Now, I recognize that i n this case i t would probably be a mistake
to t r y to subject this to appropriation discipline f o r many reasons.
However, I do think that when you exchange assets as you put i t
here, you are incurring perhaps a greater risk.
Perhaps you are acquiring an asset that w i l l deteriorate more
rapidly.
I t h i n k that the reason why we can make an exception of this is
because of the liquidity involved and the short-term nature of whatever obligations you get.
B u t i t seems to me that the fact that we don't go through the
appropriation process here should make i t all the more important that
both Banking Committees i n the House and Senate have access to
information which, under the way this is drafted now, only the
Foreign Relations Committee might have.
So I t h i n k that this is a reason why we should follow this very
closely and assume f u l l responsibility for i t and recognize that unlike
other financial transactions i n the Federal Government this is somet h i n g that we aren't checked on by another jurisdiction.
M r . REES. I can understand your concern.
I went into this i n great detail because I was concerned also.
What happens, when they draw down dollars, is that we then have a
reserve position w i t h I M F . A n d at any time, automatically, without
condition, without any condition, we can then draw down other convertible currencies such as, say, the German mark, which is r i g h t now
a very strong currency. So that i t really is not an expenditure. I t is
something we can automatically draw down.
Now, you take the Eximbank. As you know, Senator, I didn't want
the Eximbank i n the budget because I felt that i t was not an expenditure, i t was a loan and you took i t into accounts receivable.
Senator PROXMIRE. That is true of most of our loan programs, most
of our housing programs. Y o u can discount the mortgages, too.




39
M r . BEES. Yes. B u t when you take back an accounts receivable there
are conditions on them. Let's say i t is a 10-year loan and you can't
call i t for 10 years. But here there is an automatic without condition
draw by the United States, so there is a great deal of difference.
They can do i t just like that.
Senator PROXMIRE. A S I say, I am not stressing that. I feel very
strongly Export-Import Bank ought to be i n the budget and I think
a lot of other things ought to be. But I am not saying at the moment
this should be.
I am saying this is another reason why we should have effective
oversight, follow this closely because i t would not be a regular opportunity through the appropriation process, that discipline which we are
required to determine what happens to the funds of our Government,
and for that reason i t seems to me we ought to be fully informed.
M r . BEES. Well, I certainly agree w i t h you on that.
I am a great believer i n oversight.
Senator PROXMIRE. Are you familiar with the amendment as adopted
i n the Foreign Relations Committee after i t came over from the
House?
Mr. BEES. I just received a copy. I think there is a problem of germaneness, i n that the amendment of Senator Percy covers a far
broader mix of agencies than just the I M F .
For the b i l l to be germane to a House bill, it would have to be limited
specifically to the I M F .
Senator PROXMIRE. That is good to know. Maybe we can improve
that i n this committee.
Mr. BEES. That is a horseback opinion. I have not talked to the
Parliamentarian.
I do think that i t would be considered ungermane.
Senator PROXMIRE. Thank you.
Senator STEVENSON. Thank you, Congressman Bees.
Mr. BEES. Thank you very much for the opportunity.
Senator STEVENSON. Congressman Paul ?
STATEMENT OF RON PAUL, REPRESENTATIVE I N CONGRESS
FROM THE STATE OF TEXAS
Mr. PAUL. Thank you, Mr. Chairman.
I have a written statement that I would like to submit, but I would
like to make a few comments.
Senator STEVENSON. Without objection, i t w i l l be entered i n the
record.
M r . PAUL. I n the Banking Committee I was the one who voted
against this bill. I t was a 24-to-l vote.
B y the time i t got to the floor, 10 members of the Banking Committee voted against this bill. So I think this goes to show that there
were some reconsiderations and second thoughts on this bill.
I t was stated in our committee that these were some technical
changes in the Bretton Woods Agreement.
This is the size of it, and I would like to emphasize this. This is
more than technical.
The Senate statement in one of the introductions I read said that
they were fundamental changes, and I would have to agree w i t h that,




40
that these are fundamental changes, that we are going through fundamental changes i n the International Monetary Fund.
I feel as though a vote for this b i l l is a vote for inflation, especially
on an international level.
I do not agree w i t h the sale of the gold. I do not t h i n k that is the
proper way to handle this.
I think what they are doing also w i t h the profits f r o m this gold,
funds that they get, they are using this to give to the T h i r d W o r l d
nations is t r u l y foreign aid and should be under control of the Congress and not tnrough some international body.
I ibelieve i n international monetary issues, we find a good b i t of
ignorance floating about.
I t h i n k there are several reasons for this. I t is boring to many people. They do not involve themselves i n the issues. A n d i t is also a nonpolitical issue. Y o u don't gain votes by talking about I M F back i n
your district.
So for this reason people do not interest themselves i n a political
sense and there is disinterest i n subjects such as this.
We have had statements made i n the past on monetary policy that
disturb me. I think they reflect the disinterest they have.
A t one meeting Kennedy walked into, he said, " T e l l me again; how
does the Federal Reserve System finance our debt." H e was confused
about exactly how the financing worked.
M r . Johnson one time said that, " W e w i l l see that there is so many
silver half-dollars i n circulation that nobody w i l l hold them," not
understanding that bad money drives out good money. So he produced
more half-dollars i n 1 year than had been minted i n approximately 100
years. Yet the silver half-dollars disappeared. H e could not defy the
laws of economics.
I understand on one of the Watergate tapes M r . Nixon said, " D o n ' t
bother me w i t h devaluation. Just take care of it. Do what you have
to do." To h i m i t was unimportant.
B u t I do believe that this is a general problem. There is a good b i t of
economic ignorance that floats around.
A f t e r the Smithsonian agreement, which was i n 1971—it was
heralded by the President, "The greatest monetary agreement i n the
history of the world." I t lasted a little over a year.
People are heralding this as a fundamental basic good change. I
don't think i t w i l l be any better than the changes made i n the Smithsonian agreement.
This bill, i n essence, ratifies floating, phasing out the gold, increases
quotas, and establishes a new powerful executive council.
I t h i n k the phasing out of the gold problem is a continual harassment and continual hostility toward sound money, honest money, commodity money, and I disagree w i t h this.
The opposite of honest commodity money is inflation, inflation
either at a local governmental/national level or on a scale such as we
are talking about later i n the I M F .
The sales of gold, I consider illegal. This was backed up by a statement f r o m the Library of Congress; they use the scarce currency clause
to sell this gold. I f anybody knows anything about dollars these days
they are not too scarce so they are really stretching the point about the
scarce currency clause.




41
A n d the method they are using i n selling the gold, by first giving i t
to the Treasury for $42, then the Treasury resells i t to the F u n d at $42
and the F u n d sells i t at market price using the profit for foreign aid.
They have disrupted the market so much that the price of gold has
been driven down to such a degree that what i t is t r y i n g to accomplish
i t is not doing because they are not having near the funds they once
thought they would accumulate for these foreign aid projects.
I think what they don't want is the discipline and integrity of an
honest money system. This is the reason that they must go ana be on
record and be registered saying that we do not want to have anything
to do w i t h gold and restraints and disciplines.
On the subject of quotas; I disagree that i t is a transfer of assets.
I f the American taxpayer wants those $2 billion, he cannot get them
back. I t is only under very special circumstances that we can benefit
once that $2 billion gets into the fund. I think i t should be i n the
budget.
I know M r . Proxmire has always been concerned about budgetary
matters and watches fiscal policy and I would hope he would agree
J 1
J
' to the budget because I think i t is dereliction of our
I t was i n the budget up u n t i l 1969 and i t should be put back. The
Executive Council bothers me. You mentioned your concern about
getting information and materials from the I M F . Let me tell you,
when this goes into effect, the information is going to go i n one direction. I t is going to go from us to the I M F .
M r . Simon stated the amendments "provides 'broad new authority
for the I M F to oversee the compliance of each member with its obligation. This authority for fund surveillance gives the fund the tactic
of applying a global perspective to action of those members that cause
adjustments or other problems for other nations."
"Members are obliged to provide the fund w i t h information necessary for surveillance of these exchange rate policies." The other thing
that is very important here, i t isn't only the deficit countries they want
to control and tell them what to do w i t h their fiscal and monetary
policies, i t is the surplus countries.
I f we ever went back i n this country to sound monetary policy and
sound fiscal policy, and had a sound dollar and d i d not inflate, we
could become a surplus country again. Even i f we kept our house i n
order under these arrangements, they w i l l have the right to come i n
and supervise our fiscal policy so that they can take the benefits we
have had i n this country from good monetary policy and export them
to somebody such as England or I t a l y that may be needing some help
due to an inflationary policy.
This act also ratifies floating. We have been floating since 1973,
officially. We do not need an I M F to float. The float evidently is necessary as a market adjustment for different nations inflating at different
rates. We cannot go back to arbitrarily fixed rates.
The only way you could get a fixed rate is i f you related each individual currency to some relatively fixed commodity such as silver
and gold. So you cannot arbitrarily set fixed rates but to t r y to supervise floating rates and set up a lot of rules and regulations and then
you have England inflating at a certain rate and us at another rate.
It's doomed to failure.




42
The devaluation that everybody heralded as a tremendous help to
us a couple years ago has not really helped. Devaluation i n this way is
a temporary device that helps just for a short time. Right now, i f you
look i n the papers i n the W a l l Street Journal, i t shows our deficits in,
our balance of trade was up over $800 million last month.
Just because you lowered the cost of exports, the cost of imports go
up. I t also increases demands because your prices went down temporarily. W i t h the increase i n demands and increase i n the cost of your
imports, you go back to the need for higher prices i n your country and
then a need and incentive to inflate the currency again.
Switzerland hasn't belonged to the I M F . They have a relatively
sound currency. They do not have inflation. They do not have this
k i n d of problem. T o think that a system, an international system can
work on floating is like arguing for 50 currencies i n this country.
I f we can realize that the benefit of the sound currency or one currency that we can relate to i n 50 States, then we can realize why we
need one currency of soundness throughout the world. The problem
here is a moral problem as well as an economic problem.
The problem is that of inflation. The unwillingness of nations to pay
for what they are spending. We inflate because we have a deficit, $75
billion, $80 billion a year because we pass out to people things that
they want and we don't have the guts and the courage to tax them i f
that is what t r u l y is necessary.
So, what do we do, we increase the monetary supply and that is inflation. Now, we are planning to condone i t and do i t on an international scale. I am convinced i t w i l l not work. W i t h i n a few years we
w i l l know that I don't t h i n k there is any doubt that we cannot defy the
laws of economics.
Sound money has always been the rallying point, 5,000 years of
history has proven that. Even though we have gotten away w i t h this
for a good many years, even though we arbitrarily kept the dollar
related to gold at $35 an ounce, i t was because we were so wealthy that
we got away w i t h it. Eventually the system fell apart and now we are
i n worse shape than we have ever been.
We do not have a store of wealth like we had before. W e have an
economy that is very shaky. Nobody is sure that we w i l l completely
get out of this recession that we have just gotten over. H o w can we
support an unsound dollar and unsound currency and an international
monetary scheme that we are working on here now, I say that we have
serious considerations for what is going on and i t is our obligation
and duty as Representatives i n this Nation to study i t closely.
Thank you very much.
[Complete statement follows:]
PREPARED

STATEMENT

OF R O N

P A U L , REPRESENTATIVE
S T A T E OF T E X A S

IN

CONGRESS FROM

THE

Mr. Chairman and Members of the Committee, I wish to thank you for the
privilege of testifying before you today on this very important piece of legislation.
The bill before you, H.R. 13955, represents the most sweeping revision of the
agreements govering America's international monetary affairs in over thirty
years. I have spent a great deal of time studying it and believe very strongly
that i t should not be passed.
THE

JAMAICA

AGREEMENTS

The bill before you is only five pages long. This is very deceptive because it
makes it appear as though there is not much to this bin. However the first sec-




43
tion of it says: "The United States Governor of the Fund is authorized to
accept the amendments to the Articles of Agreement of the Fund approved in
resolution numbered 31-4 of the Board of Governors of the Fund."
These are the agreements made in Jamaica last January and the printed version of them runs to several hunderd pages. These agreements were not delivered
to the members of the House Committee on Banking, Currency and Housing until
the very day that this bill was marked up. I am certain that none of the members of the House were able to digest this huge mass of material before the
final vote on July 27.
FLOATING E X C H A N G E

BATES

Among other things, these agreements will legalize many arrangements which
currently exist outside the existing law. For example, floating exchange rates,
which have been in existence for several years already, are illegal under the
Bretton Woods Agreement as it now stands. The Congress, however, has never
had the opportunity to decide on the desirability of floating until now. Therefore, I think it is an appropriate time to ask whether it is really a good idea or
not.
I n terms of the pre-1971 fixed exchange rate system, which broke down so
dramatically, floating is certainly superior. However this is only because the
dollar was greatly overvalued in 1971 as a result of considerable domestic inflation. The dollar needed to be brought into line with its true value. But to say
that floating is a panacea which solves all international exchange problems is
clearly not true.
One can well imagine the difficulties which would be encountered if each one
of the United States was to have its own currency, even if there were freely floating exchange rates. Obviously, this would be a large barrier to commerce which
would make the United States a poorer nation. The fact that the dollar has been
the common currency of all the states is certainly one of the unheralded secrets
of American prosperity.
THE

GOLD STANDABD

The classical gold standard operated in much the same way on a world-wide
scale. Gold was, in fact, the world currency and it made international trade and
investment posible on a scale which would have been impossible otherwise.
The Bretton Woods system essentially replaced gold with the dollar as an
international currency. Unfortunately, this new system lacked one of the principal virtues of gold: there were no longer any external or automatic forces
restraining the creation of more and more money. An increase in the supply of
gold is obviously dependent on the profitability of producing gold and limited by
the scarcity of gold itself. There are no such limits on the issuance of paper
money.
As long as the number of dollars in existence was tied to a limited amount of
gold, there was restraint imposed upon the domestic monetary authorities from
outside. This, in turn, led to unprecedented price stability and prosperity. As
long as some semblance of fixed exchange rates remained, this also imposed some
restraint. With floating, however, almost all barriers to the unlimited issuance
of paper money are now gone. This fact was brought out clearly in testimony by
Professor Arthur Laffer of the University of Chicago before the Subcommittee
on International Trade, Investment and Monetary Policy:
"While much is made of preventing imported inflation by having floating exchange rates, little is made of the disciplinary aspects of fixed exchange rates
and limited international reserves. Under fixed exchange rates that are to be
maintained, central banks have little leeway to run excessively expansive monetary policies. I f a country's money supply grows excessively, it will lose reserves
and threaten the maintenance of the fixed exchange rate. The threat of balance
of trade deficits, reserve losses and, ultimately devaluation of the currency is an
important restraint on rapid money growth.
"Under floating exchange rates, excessive monetary expansion entails no deficit, no reserve loss, and a tolerated, if not encouraged, depreciation of the currency. Under floating rates, there is less reason, or perhaps even excuse, for not
restraining money growth. I f for any reason, be it economic or political, the
monetary authority feels it expedient to expand money growth, the excuse of
maintaining the par value will not impede their actions."
CURRENCY

MANIPULATION

Floating also makes it easier for governments to artificially manipulate the
value of their currency on money markets in order to gain short-run trade ad-




44
vantages. The Japanese, for example, are notorious for holding down the value
of the yen in order to promote their exports. This has become known as a "dirty"
float and would be prohibited if the Jamaica Agreements are ratified. Secretary
Simon has said that agreements on this principle at Jamaica was a "victory"
for the United States and the main reason why this bill should be passed.
I f we look a little deeper, it can be seen that the Japanese don't really gain
anything in real terms over the long run. They are able to keep the value of
the yen down in terms of dollars only to the extent that they have a continuous
supply of dollars to buy. I n this sense, therefore, they are doing the United
States a favor by soaking up excess dollars and thereby holding down price inflation in the United States. I n an editorial on August 3, 1976, the W a l l Street
Journal went on to say:
"How many times does Britain have to sink the pound and Italy the lira
before the bitter-enders concede that devaluations do not bring prosperity, only
price inflation? Japan should be left alone, to fix or float against the dollar according to its own calculations. Even if there are policymakers in Japan who
hold to obsolete mercantilist trade theory, and believe they can steal resources
from their trading partners through exchange-rate policy, the experience of history and of recent history in particular says they are wrong."
Thus in return for a meaningless pledge that will probably'not be honored and
can't be enforced anyway, the United States would commit itself to acceptance
of many other potentially harmful provisions of the Jamaica Agreements.
THE I M F COUNCIL

Article X I I , for example, establishes a new council within the International
Monetary Fund. The general functions of this council are defined as "the supervision and adaptation of the international monetary system, including the continuing operation of the adjustment process and developments in global liquidity ; and in this connection the Council must review developments in the transfer of real resources to developing countries."
To me, this sounds very ominous. Any council with powers such as this would,
in effect, become an international Federal Reserve Board. I f so, this would
place a tremendous, amount of power in the hands of people with no allegiance
to the United States. While it is not clear that there is danger in this, it certainly deserves further investigation.
FOREIGN AID

Another section repeals the Par Value Modification Act. As innocuous as this
may sound, it is essential for the continuation of the IMF's gold selling and trust
fund operation. This too exists illegally, according to Article V I I , Section 2 of
the I M F articles, As the Library of Congress put i t :
"There is no authority, either directly or indirectly, outside of a scarce currency situation, for the I M F to sell gold on and for its own account under that
clause. Particularly would this seem to be the case for the use of proceeds to
set up a trust fund for the developing nation members."
As you all know, the I M F has sold 780,000 ounces of its gold on two separate
occasions and is scheduled to sell another 780,000 on September 15. The profits
from this sale are then to be used to aid developing nations with balance of
payments problems.
I n order to get around the legal restrictions on selling its gold, the I M F has
created an artificial scarce currency situation regarding the dollar. By declaring
that there is a world-wide shortage of dollars, the I M F is free to sell its gold to
the U.S. Treasury at the official price of $42.22, ostensibly to obtain dollars in
order to relieve the shortage. Secretary Simon then obligingly sells the gold back
to the I M F Trust Fund at the same price. The Trust Fund is now free to resell
the gold for whatever the market will bring. So far, this has been in the range
of $122 to $126 per ounce. Thus the U.S. Treasury is a direct party to the sale of
this gold and responsible for losing the profits of its sale. These profits legitimately belong to the people of the United States because the U.S. contributed
most of the I M F gold after World War I I for the sole purpose of stabilizing
international exchange rates and not for a back-door foreign aid scheme. Furthermore, Professor Laffer noted:
"As a method of helping poor nations develop, this method is noted for its
inefficiency. Far preferable schemes exist, some of which even benefit the U.S.
directly. Examples of these include tariff cutting, reduction of quotas, and the removal of other artificial trade barriers. These measures provide direct incentives




45
to development. By working harder and more efficiently, less-developed countries would be able to sell more goods to the developed nations."
One should also consider the fact that the recipients of I M F aid include many
countries that are very unfriendly to the United States. Among those eligible
nations one finds Cambodia, Laos, South Vietnam, and Uganda. I n addition, of
the 61 nations listed as eligible recipients, over one half supported the recent
United Nations resolution equating Zionism with racism.
CENTRAL B A N K S

Another disturbing aspect of this gold sale is the strong possibility that much
of this gold is being bought by foreign central banks. This fact was admitted to
me in a letter from Secretary Simon on July 20. He said that the Treasury Department was fully aware that France had announced the purchase of one ton
of I M F gold through the intermediary of the Bank for International Settlements.
This would seem to be in clear violation of Article I V , Section 2 of the I M F
articles. Secretary Simon, however, said he is not concerned about this, although
he is the American governor of the I M F .
My concern is that this gold may hang like a sword of Damocles over the
United States. I frankly do not believe that the present international monetary
system will hold up for long. A system which accommodates and encourages
inflation so easily can only lead to greater and greater instability. Eventually
there will be a demand for the return to sound money. This may lead some
country or group of countries to unilaterally restore gold convertability. There
is no doubt in my mind that this would put the dollar in about the same class
as the Polish zloty.
INCREASED RESERVES

Lest you scoff at such a notion, consider another provision of H.R. 13955 which
authorizes an increase in the quota of the United States in the I M F equivalent
to 1,705 SDK's. This is approximately $2 billion which will leave the U.S. Treasury. On top of our already bloated Federal budget, how can this be justified?
Proponents of this bill will argue that this is simply an exchange of assets
since we can call upon the resources of the I M F in times of monetary crisis. I
would remind you, however, that this money is still leaving the Treasury the
same way it does for any other expenditure. Consequently, up until 1968 such
payments to the I M F were treated as regular appropriations subject to the
normal appropriations process. Then, in an effort to disguise the true level of
the Federal deficit, this appropriation was taken off the budget and treated as
though it were simply a bank deposit. This is obviously not true because the
U.S. can only get this money back by actually dissolving the I M F or by having
an international monetary crisis.
There is also no reason to believe that an increase in I M F reserves is justified
anyway. The I M F was established and given its reserves in order to stabilize
international exchange rates within the limits set by Bretton Woods. Yet as
long as we have floating, this function no longer exists. The whole I M F is, in
my opinion, an anachronism as a result. I believe that this is the true reason
behind the establishment of the I M F Trust Fund; the I M F bureaucrats were
just trying to find some new way to justify their existence.
I n closing, I would simply urge my colleagues in the Senate to reject H.R.
13055, or at least delay passage long enough so that a fuller investigation of its
consequences might be made before it is too late.

Senator STEVENSON. Thank you, Congressman Paul.
I would certainly agree w i t h your first proposition that this legislation can't masquerade as both fundamental reform and as a technical
change. I suspect the t r u t h lies somewhere i n between.
I have just one quick question. No one would quarrel w i t h your
objective, sound money, honest money as you put it. B u t i f the foundation of the monetary system is gold, and the value of gold is linked to
the vagaries of the gold market, and the control which certain gold
suppliers have i n that market, most particularly the Soviet Union,
what leads you to conclude that that is the way to achieve your objective or to make i t a sounder method of achieving that objective?

76-795 0 - 76 - 4




46
M r . PAUL. I t h i n k i t is very easy to, because I t h i n k gold production
whether i t is i n South A f r i c a , America, or Russia comes very slowly.
I t comes at a certain cost which is the market cost of producing gold.
Russia and South Africa's production of gold is not the problem.
I t is the government. The government is the problem, international governments, the International Monetary F u n d dumping gold,
American hostility to gold, and the threat of sales. This is the problem.
I t is only government interference i n the market that has caused these
tremendous fluctuations. Also the tremendous fluctuation i n the discrepancies between currencies and the way the different countries are
inflating is the real problem.
I f you take a period of history i n the 19th century when the B r i t i s h
Empire was developing and was at their peak, they had tremendous
growth and prices actually dropped. They were on the gold standard. So you do not need to have anything other than the government
out of the manipulation of the gold market and not inflating, i n
order to have reasonable stability. The other alternative is to trust
politicians and paper (fiat) money—and history is certainly against
a stable monetary system under those circumstances.
Senator STEVENSON. D O you have any evidence to corroborate that
statement that it's been sales by governments, and by the I M F of
gold, as opposed to sales by the Soviet Union and South A f r i c a , that
have caused recent fluctuations i n the value of gold?
M r . PAUL. I could probably corroborate this w i t h others' opinions
because you know you can see a sale of gold and threat of the sale
of gold, then, you can see what happens to the p?.rticular price of gold
following these sales. Y o u can listen to what viie Swiss bankers say
and what the American bankers say and commodity market people,
and I don't t h i n k there is any question i n anybody's m i n d that for
the past i y 2 years the disruption has been the sales of the gold f r o m
the International Monetary Fund, plus the threat of sales of gold
by our Government. So, I don't think there is any question. B u t as
far as me proving this, that's another question. I think i t comes down
to opinions of different economic experts and i n making your own
decision.
Senator STEVENSON. Well, there may be a combination.
Senator Proxmire.
Senator PROXMIRE. Congressman Paul, why d i d nine members of
the House Banking Committee change their position? Y o u mentioned
that. That is a good point. Y o u were the only one you say, then on the
floor, nine changed their position.
M r . PAUL. Whether or not they all changed, I don't know
Senator PROXMIRE. I understand that.
M r . P A U L . T O tell you the truth, I didn't talk to them personally,
but I d i d a lot of letter w r i t i n g and sending out information. I wouid
have to hope that, influencing them w i t h an idea and some arguments
might have swayed them but I really can't say.
Senator PROXMIRE. I S that a bipartisan group?
M r . PAUL. Yes, four-Democrats and five Republicans, who came
over. I t h i n k they were less concerned about the depth of what this
means than I was. I t h i n k they were more concerned about whether
or not i t was legal to sell gold. We get a lot of letters back about,
you know, i t is American gold, that we are selling and giving away
the proceeds. I t is a political issue.




47
The other t h i n g is the issue of foreign aid. People despise foreign
aid these days. They are out there, and they can't buy groceries and
here we are g i v i n g foreign aid underhandedly.
I would say this had some influence.
Senator PROXMIRE. I understand there were two votes on the House,
one on suspension and I can understand there m i g h t have been some
resistance to that on the grounds the report hadn't been filed, they
didn't know enough about i t ; then, there was a vote on final passage.
Was the vote on final passage, was there that much opposition at that
point?
M r . PAUL. The 10 votes I refer to was on final passage. W e had
more votes against the bill, just as you expected, on suspension. There
were 147. Then i t went down to about 121. Those people probably were
those you mentioned, concerned about the rushing through of the bill.
B u t on the final passage, there were 10 banking members who voted
against the bill.
Senator PROXMIRE. Y O U are anxious, I understand, to get the Government out of the purchase of gold, you say that is one o f the problems
you have.
M r . PAUL. Purchase and sale.
Senator PROXMIRE. Purchase and sale, is t h a t r i g h t ?

M r . P A U L . A S f a r as International Monetary Fund, my belief is that
i t came f r o m governments. I t should just be given back to the contribu t i n g governments and then those countries themselves can decide
what they want to do w i t h the gold. I f our policy is antigold, then
thev should sell the gold to the American people. I t is going to be
Senator PROXMIRE. YOU see i f y o u get the governments out o f this,

then goM isn't a monetary item, is i t ?
M r . P A U L . N O , but that is the decision we have to make. So f a r our
policy has been to demononetize the gold. So, I would say i f i t goes
back to America and the U n i t e d States decides to sell i t , we can express
our opinions but i f they sell i t , sell i t to the American people but they
should not underhandedly sell i t and give the profit to some international body f o r foreign aid.
~ Senator PROXMIRE. I f you get the governments out of this, then what
is your honest currency ?
M r . PAUL. I don't t h i n k we w i l l have one. W e w i l l have fiat money
totally, which we reallv have now.
M y opinion would be t o — i t would be better to have gold-backed
currency.
Senator PROXMIRE. W o u l d you put i n the record the L i b r a r y of
Congress study ? I understand there is some controversy over what i t
actn all v said.
M r . PAUL. Yes, i t was an answer to Representative John Conlan. I
believe we have a copy of that.
Senator PROXMIRE. W e would like to have that f o r the record. Thank
you. M r . Chairman.
[The material follows:]







49

THE LIBRARY OF CONGRESS
Congressional

WASHINGTON, D.C.

Research

Service

20540

June 10, 1976

To

Honorable John Conlan
Attention:
Louis C. Gasper

From:

American Law D i v i s i o n

Subject:

A u t h o r i t y of t h e Board of Governors t o S e l l Gold Under A r t .
V I I , Sec. 2 o f t h e A r t i c l e s of the I n t e r n a t i o n a l Monetary
Fund

T h i s memorandum i s submitted i n response t o your request

for

an a n a l y s i s of t h e a u t h o r i t y of t h e Board of Governors of t h e I n t e r n a t i o n a l Monetary Fund (IMF) under A r t . V I I , Sec. 2 of t h e A r t i c l e s of
the I n t e r n a t i o n a l Monetary Fund (3 Bevans 1351) w i t h r e f e r e n c e t o the
d i s p o s i t i o n of o n e - t h i r d ( o r 50 m i l l i o n ounces) of t h e IMF*s present
gold h o l d i n g s as one o f t h e f i r s t steps to phase gold out of t h e i n t e r n a t i o n a l monetary system, and w i t h h a l f of t h a t amount (25 m i l l i o n
ounces) t o be sold a t p u b l i c a u c t i o n w i t h t h e p r o f i t s t o f i n a n c e a
T r u s t Fund t o p r o v i d e balance of payments a s s i s t a n c e t o t h e developing
countries.

S p e c i f i c a l l y , you have asked;
1,

I s Art« V I I ( 2 ) ( i i ) s u f f i c i e n t a u t h o r i t y f o r
t h e Governors t o a c t , w i t h o u t seeking r a t i f i r c a t i o n by Member Countries?

2,

I t appears t h a t t h i s t r a n s a c t i o n was never
contemplated by Members of t h e IMF a t t h e
time t h e o r i g i n a l A r t i c l e s were adopted.




50
CRS-2

I s . t h e r e an " e l a s t i c c l a u s e " t h a t
s p e c i f i c a l l y p e r m i t s such an e x p a n s i o n o f scope?
I f n o t , i s such
" e l a s t i c i t y " assumed?
T h u s , i t would appear t h a t t h e g i s t o f y o u r f i r s t
has two a s p e c t s .

First,

does A r t . V I I ,

Sec. 2 g i v e a u t h o r i t y f o r

d i s p o s i t i o n o f g o l d by s a l e f o r such a purpose as t o phase
o f t h e i n t e r n a t i o n a l monetary system?

question

gold out

Second, c a n proceeds f r o m such

a d i s p o s i t i o n be used under e x i s t i n g a u t h o r i t y t o s e t up a t r u s t
f o r the developing nations?

W h i l e t h i s m i g h t appear t o b e a

s i m p l e and n a r r o w a r e a f o r a n a l y s i s ,
opposite i s t r u e .

the

it

should be n o t e d t h a t

fund

relatively
the

T h i s m a t t e r i s r a t h e r complex and would appear t o b e

s u b j e c t t o v a r y i n g i n t e r p r e t a t i o n s and o p i n i o n s .

Due t o t h e h a s t e

in

w h i c h t h i s response was n e e d e d , no i n - d e p t h s t u d y c o u l d be made o f

these

p r o b l e m s , and no d e t a i l e d o r d e f i n i t i v e a n a l y s i s c o u l d t h e r e b y be made.
None o f t h e voluminous background and h i s t o r i c a l documents i n t h e
c r e a t i o n was examined.

IMF's

The comments t h a t appear h e r e i n a r e p r e s e n t e d

s o l e l y on t h e b a s i s o f t h e t e x t o f t h e a r t i c l e s and m a t e r i a l , g l e a n e d
from s e l e c t e d law review a r t i c l e s ,
overview of the

and should o n l y b e r e a d as a g e n e r a l

situation.

Art, VII,

Sec, 2 i s a p r o v i s i o n i n t h e S c a r c e C u r r e n c i e s

of the A r t i c l e s of the IMF,

It

i s a p p a r e n t l y r e f e r r e d t o as t h e

currency clause" or the "replenishment" p r o v i s i o n ,

"scarce

Support f o r i t s

i n t h e g o l d p r o p o s a l has been s t a t e d b y S e c r e t a r y o f t h e T r e a s u r y ,
E . Simon, i n a l e t t e r




t o Rep. Reuss d a t e d J a n u a r y 2 6 , 1975 as

part

use
William

follows:

51
CRS-2

The method proposed f o r m o b i l i z i n g t h e I M F ' s
g o l d i s based on IMF p r e c e d e n t and s p e c i f i c a l l y
has t h e s a n c t i o n o f t h e IMF l e g a l s t a f f .
The
t e c h n i q u e t o be used i s t h e f a m i l i a r one o f
" r e p l e n i s h m e n t , " whereby t h e I M F , t o t h e e x t e n t
i t has a need f o r c u r r e n c i e s , exchanges g o l d
f o r those c u r r e n c i e s , a t the o f f i c i a l p r i c e ,
and uses t h e c u r r e n c i e s i n i t s o p e r a t i o n s .
The d i f f e r e n c e between p a s t uses o f IMF g o l d
f o r r e p l e n i s h m e n t and t h a t proposed f o r t h e
t r u s t fund i s t h a t , i n t h i s c a s e , t h e " p r o f i t s "
on t h e g o l d used i n r e p l e n i s h m e n t w i l l a c c r u e
t o t h e proposed t r u s t and t h u s t o t h e d e v e l o p ing countries.
. . .
I t i s important to note,
i n t h i s r e g a r d , t h a t i t i s t h e IMF w h i c h has l e g a l
t i t l e t o t h e g o l d t o be s o l d .
The member
c o u n t r i e s t h a t p a i d g o l d t o t h e IMF as p a r t
of t h e i r s u b s c r i p t i o n s , r e c e i v i n g i n r e t u r n
drawings r i g h t s i n t h e I M F , t r a n s f e r r e d t i t l e
t o t h e g o l d t o t h e IMF and have no l e g a l c l a i m
to i t .
I n f a c t , t h e g o l d i n t h e IMF was always
i n t e n d e d as a source o f u s a b l e c u r r e n c i e s under
t h e r e p l e n i s h m e n t p r o v i s i o n s and t h e IMF h a s ,
on a number o f o c c a s i o n s i n t h e p a s t , s o l d
gold f o r t h i s purpose.
Thus t h e s a l e o f g o l d
t o o b t a i n u s a b l e c u r r e n c i e s i s i n no way n o v e l
or a d e p a r t u r e from past p r a c t i c e s . . . .
H e a r i n g s on The IMF Gold Agreement
B e f o r e t h e Subcomm. on I n t e r n a t i o n a l
Economics o f t h e J o i n t Economic Comm.,
9 4 t h Cong., 1 s t Sess. ( 1 9 7 5 ) , a t
78-80.
Two o f t h e s e p a s t p r a c t i c e s r e f e r r e d t o p r o b a b l y i n c l u d e a 1956
p r e t a t i o n and t h e 1 9 6 1 b o r r o w i n g a r r a n g e m e n t ,
of January

inter-

" I n an i n t e r p r e t a t i o n

of

1 9 5 6 , t h e E x e c u t i v e D i r e c t o r s d e c i d e d t h a t t h e Fund had

an i m p l i e d power t o s e l l a p o r t i o n o f i t s g o l d f o r d o l l a r s i n o r d e r
i n v e s t t h e proceeds i n s h o r t - t e r m U n i t e d S t a t e s Government

securities.

The purpose o f t h e i n v e s t m e n t was t o e a r n income t h a t would o f f s e t




to

the

52
CRS-2

c a p i t a l i m p a i r m e n t r e s u l t i n g f r o m t h e excess o f a d m i n i s t r a t i v e
o v e r income.

. . .

I n 1 9 6 1 , t h e Fund deemed i t

a r r a n g e m e n t s under w h i c h i t
o f t e n members .

.

.

expenses

a p p r o p r i a t e t o make

c o u l d c a l l f o r advances o f t h e

currencies

The purpose o f t h e arrangements was t o e n s u r e

t h e Fund would be a b l e t o supplement i t s r e s o u r c e s i n o r d e r t o meet
r e q u e s t s o f t h e t e n members i n v o l v e d t o p u r c h a s e each o t h e r ' s
f r o m t h e Fund.
made i t

had

p o s s i b l e t h a t t h e r e would be r e q u e s t s o f a m a g n i t u d e t h a t

the

resources,

and t h a t w i t h o u t such r e s o u r c e s i t would n o t b e a b l e t o f o r e s t a l l
cope w i t h an i m p a i r m e n t o f t h e i n t e r n a t i o n a l monetary s y s t e m . "

or

Gold,

I n t e r p r e t a t i o n b y the- I n t e r n a t i o n a l M o n e t a r y Fund o f i t s A r t i c l e s
Agreement -

II,

16 I n t ' l & Comp. L . Q .

A s t r i c t reading of A r t .

2 8 9 , 3 0 3 , 320

VII,

S e c . 2 , h o w e v e r , does n o t

I t m e r e l y p r o v i d e s f o r two s t e p s t h a t t h e Fund can t a k e

t i o n a l l y as i t

deems a p p r o p r i a t e t o " r e p l e n i s h i t s h o l d i n g s o f

member's c u r r e n c y " .

It

T w e n t y - f i v e Years A f t e r ,

disposiinstituany

i s e v i d e n t l y addressed to the problem o f

b a l a n c e o f payments e q u i l i b r i u m .

of

(1967).

a p p e a r t o g i v e t h e s p e c i f i c o r i m p l i e d power f o r t h e proposed
tion.

the

currency

The new c o n d i t i o n s o f w i d e s p r e a d c o n v e r t i b i l i t y

Fund would n o t be a b l e t o meet r e a d i l y w i t h o u t s u p p l e m e n t a r y

that

a

M e i e r , The B r e t t o n Woods Agreement

23 S t a n f o r d L . Rev. 235 ( 1 9 7 1 ) .

T h e r e i s no

authority,

e i t h e r d i r e c t l y or i n d i r e c t l y ,

situation,

f o r t h e IMF t o s e l l g o l d on and f o r i t s own a c c o u n t under

that clause.

outside of a scarce

currency

P a r t i c u l a r l y would t h i s seem t o be t h e case f o r t h e use




-

53
CRS-2

o f proceeds t o s e t up a t r u s t fund f o r t h e d e v e l o p i n g n a t i o n members.
T h e r e a r e no p r o v i s i o n s i n t h e A r t i c l e s o f Agreement t h a t draw a d i s t i n c t i o n between developed and d e v e l o p i n g c o u n t r i e s , and t h e r e i s a
l e g a l p r i n c i p l e t h a t governs t h e a c t i v i t i e s o f t h e IMF known as t h e
p r i n c i p l e of u n i f o r m i t y .
but i t

"The p r i n c i p l e i s r e f e r r e d t o as u n i f o r m i t y ,

r e a l l y c o n s i s t s o f two e l e m e n t s .

c e r t a i n exceptions,

One element i s t h a t ,

with

t h e A r t i c l e s o f Agreement e s t a b l i s h t h e same r i g h t s

and o b l i g a t i o n s f o r a l l member c o u n t r i e s o f t h e Fund, and t h e o t h e r
element i s t h a t t h e p o l i c i e s o f t h e Fund a p p l y e q u a l l y t o a l l members.
The p r i n c i p l e can b e r e g a r d e d ,

therefore,

as one t h a t p r e v e n t s

dis-

c r i m i n a t i o n i n f a v o r o f , o r a g a i n s t , p a r t i c u l a r members, w i t h o u t
r e g a r d t o t h e i r economic s t r e n g t h o r weakness o r any o t h e r

characteristic."

G o l d , U n i f o r m i t y as a L e g a l P r i n c i p l e Of t h e i n t e r n a t i o n a l M o n e t a r y Fund,
7 Law & P o l i c y i n I n t ' l Bus. 765
Yet,
VII,

even i f

(1975).

one m i g h t be a b l e t o s u s t a i n an argument t h a t

Art.

Sec. 2 does n o t c o n t a i n s u f f i c i e n t a u t h o r i t y f o r t h e Board o f

Governors t o d i s p o s e o f g o l d f o r t h e purposes c o n t e m p l a t e d w i t h o u t an
amendment t o t h e A r t i c l e s ,

i t would seem t h a t t h e r e i s such a b r o a d

a u t h o r i t y w i t h i n t h e A r t i c l e s themselves f o r t h e i n t e r p r e t a t i o n by t h e
IMF o f such A r t i c l e s and f o r c a r r y i n g o u t t h e purposes o f t h e I M F ,
n o t o n l y would i t

that

seem t h a t such an i n t e r p r e t a t i o n m i g h t o t h e r w i s e be

s u p p o r t a b l e b u t a l s o t h a t t h e r e m i g h t be no forum t o a s s e r t a successf u l l e g a l c h a l l e n g e to i t .




The m a c h i n e r y f o r f i n a l i n t e r p r e t a t i o n o f

the

54
CRS-2

basic instrument of the IMF has been termed "remarkable and unusual"
because the f u n c t i o n of a u t h o r i t a t i v e i n t e r p r e t a t i o n r e s t s w i t h t h e
executive organ of the i n s t i t u t i o n , because t h e e x e r c i s e of the i n t e r p r e t i v e f u n c t i o n i s not l i m i t e d t o decisions on a c t u a l disagreements
but i s also used t o r e s o l v e doubts i n the i n t e r p r e t a t i o n and thus t o
prevent c o n t r o v e r s i e s , and because the executive organ has e x c l u s i v e
j u r i s d i c t i o n to decide on questions of i n t e r p r e t a t i o n of the i n s t r u ment t h a t may a r i s e between the o r g a n i z a t i o n and i t s members or between
members themselves.

Hexner, I n t e r p r e t a t i o n by P u b l i c

International

Organizations of T h e i r Basic Instruments, 53 Am. J I n t ' l L . 341, 343344 ( 1 9 5 9 ) .

While A r t . X V I I I only speaks of i n t e r p r e t a t i o n s of t h e

provisions between any member and t h e IMF or between members, a cons i d e r a b l e number of i n t e r p r e t a t i o n s have been made o u t s i d e t h a t A r t i c l e
i n order t o enable the IMF t o f u n c t i o n e f f i c i e n t l y .

See, M. Whiteman,

Digest of I n t e r n a t i o n a l Law, V o l . 14 ( 1 9 7 0 ) , a t 522-529.

A l l of

this

would have t o be read i n conjunction w i t h the broad purposes of t h e
IMF set f o r t h i n A r t . I

(not i n a Preamble but a c t u a l l y p a r t of the

A r t i c l e s ) t h a t i s t o guide the IMF i n a l l of i t s d e c i s i o n s .
ARTICLE

I

PURPOSES

The purposes of the International Monetary Fund are:
(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.




55
CRS-2

(ii) To facilitate the expansion and balanced growth of international
trade, and to contribute thereby to the promotion and maintenance of high
levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
(iii) To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive exchange
depreciation.
(iv) To assist in the establishment of a multilateral system of payments
in respect of current transactions between members and in the elimination of
foreign exchange restrictions which hamper the growth of world trade.
(v) To give confidence to members by making the Fund's resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without
resorting to measures destructive of national or international prosperity.
(vi) I n accordance with the above, to shorten the duration and lessen the
degree of disequilibrium in the international balances of payments of
members.
The Fund shall be guided in all its decisions by the purposes set forth in this
Article.
be
F u r t h e r , there seems to/yauthority t o the e f f e c t t h a t such i n t e r p r e t a t i o n s a r e considered t o be binding on the c o u r t s .

See, Gold,

Inter-

p r e t a t i o n by the I n t e r n a t i o n a l Monetary Fund of i t s A r t i c l e s of Agreement - I I ,

16 I n t ' l & Comp. L.Q. 289, 312-318 ( 1 9 6 7 ) .

Thus, i n e f f e c t ,

one might say t h a t the e n t i r e A r t i c l e s of the IMF are " e l a s t i c " .




D a n i e l H i l l Zafren
L e g i s l a t i v e Attorney

56
Senator STEVENSON. Thank you, Congressman. I t is helpful to have
these conflicting opinions.
M r . PAUL. T h a n k you.

Senator STEVENSON. The next witnesses are Eugene Birnbaum,
First National Bank of Chicago; Robert Roosa, now a partner i n
Brown Brothers, Harriman & Co.; Jack Bennett, senior vice president,
Exxon; Walter Salant, senior fellow, Brookings Institution; Prof.
Robert Aliber, Graduate School of Business Administration, University of Chicago; and Sidney Brown, vice president and economist,
editor of the Deak-Perera Report, Deak & Co.
Gentleman, we are grateful to all of you for joining us this morning.
I f you have prepared statements, you have an opinion of either reading them or i f you prefer to summarize, I would be happy to enter them
i n the record.
Unless there is any objection, why don't we start i n that order, w i t h
you, M r . Birnbaum ?
STATEMENT OF EUGENE BIRNBAUM, FIRST NATIONAL BANE OF
CHICAGO
M r . B I R N B A U M . Thank you, Mr. Chairman. I t is a privilege to have
been invited to testify concerning S. 3454, a b i l l to amend the Bretton
Woods Agreement Act.
I do have a prepared statement, and i n the interest of time, I
would appreciate having i t entered i n the record and then simply
highlighting some of its points.
Senator STEVENSON. Without objection, the f u l l statement w i l l be
entered i n the record. I believe, i f there is no objection, what we w i l l
do is go through all of the statements and then come back to the panel
w i t h questions.
M r . B I R N B A U M . I have appended to my prepared statement a section entitled "Supplementary Remarks." I t refers to questions raised
by you, M r . Chairman, on the Senate floor, as published i n the Congressional Record of August 5,1976.
Senator STEVENSON. Thank you for doing that, and they too w i l l be
entered i n the record.
M r . B I R N B A U M . Thank you, M r . Chairman.
I f u l l y support the proposed amendments to the I M F Articles of
Agreement, but w i l l later suggest that additional steps be taken
to insure a more orderly world monetary system.
When I testified previously w i t h respect to this bill—at the hearings of the Senate Foreign Relations Committee on June 29—I commented that i t was unclear how the currently floating SDR could
be adopted as a future standard for the international monetary system
i n the event that a high majority of the membership of the I M F should
eventually desire to shift from floating exchange rates to a new par
value system based on the SDR.
Having completed further research on this issue, I now conclude
that the proposed revisions of the I M F articles contain nothing explicit
to preclude the possible future adoption of a reconstituted, redefined
SDR, including an SDR that could even be defined on the basis of
fixed official par values of national currencies. Accordingly, my earlier
concerns regarding this matter are no longer pertinent.




57
I should like now to comment on some other important issues. I n
doing so, however, I shall t r y to avoid unnecessarily duplicating my
previous testimony before the Senate Foreign Relations Committee.
I think i t is important that Congress not expect too much i n relief
f r o m the present international monetary turmoil if. the new I M F
arrangements are adopted.
I n my judgment, the currently existing international monetary
system is unsatisfactory. Indeed, the present regime is significantly
inferior to the system that existed before August 15, 1971, although
that former system was not perfect by any means.
U n t i l the onset of floating exchange rates i n 1973, countries had
enjoyed much faster rates of expansion of their sales abroad than
sales to their home markets.
Foreign trade was, therefore, a major propulsive force i n world
economic growth.
Now, however, the risks and uncertainties i n creating new investment capacity to produce goods for export have become an important
factor i n the worldwide erosion of long-term business confidence, and
hence, i n explaining the slowdown of global economic expansion. I ,
therefore, am not sanguine about future prospects for a resumption
of sustained economic growth and steadily rising world l i v i n g
standards.
I believe Lenin was right when he reportedly said that the best way
to destroy the capitalist system is to debauch the currency. I also think
that that principle applies to the global market economy.
The world market too requires a relatively stable world money.
Although a world money doesn't literally exist, we can approach an
effective substitute i f we establish long-term confidence i n the relative
stability of exchange rates between the most important currencies of
the noncommunist world.
I would include i n that list at least the dollar, the German mark and
the Japanese yen.
Given that k i n d of confidence, these currencies would serve as close
substitutes for one another and, i n the aggregate, they would function
as the basic monetary standard of the world market system.
I n the absence of greater exchange rate stability between these major
currencies, the noncommunist world w i l l inevitably face inadequate
economic progress and increased political divisions. I believe the relative stability of major exchange rates is therefore essential to the continued preservation of freedom and democracy i n the world.
No international monetary reorime, whether founded on fixed or
floating exchange rates, can function satisfactorily unless the United
States itself restores internal economic conditions of reasonable stab i l i t v and noninflationary growth.
This is the sine qua non of an orderly world monetary system. I f we
achieve sound economic conditions i n the United States, other countries w i l l find i t i n their interests to manage their economic policies
i n such a way as to be consistent w i t h relatively stable exchange rates
between their currencies and the dollar.
Other countries, more than ourselves, understand the importance to
their economic development of maintaining relative stability of their
exchange rates vis-a-vis the currencies of the world's major markets.
The most important of these is, of course, the U.S. marked—the largest




58
single market of the world economy—along w i t h other markets which
are already closely linked w i t h that of the United States.
The United States is not a closed economy; only the world is a closed
economy. When we surprised the world by devaluing the dollar i n
February 1973 for the second time i n 14 months, we undermined foreign confidence i n the commitment of this country to maintain foreign
exchange value of our currency. I n the eyes of foreign countries, i n the
eyes of the outside world—as Lenin might have observed—we debauched our currency.
Foreigners then shifted the composition of their financial asset portfolios from instruments denominated i n dollars into instruments
denominated i n currencies they continued to trust, for example, the
German mark, the yen and the Swiss franc.
As a result, Eurodollar interest rates shot u p and the effects were
transmitted to our own borders. U.S. interest rates quickly followed
suit, stock market values sank, and the current era of generalized
monetary and financial uncertainty began.
We have yet to f u l l y recover from this trauma.
This experience illustrates the fact that the dollar is a global money,
and the Federal Reserve cannot neglect that fact. Yet, many leading
economists continue to recommend easy money policies, as i f the Federal Reserve can wholly neglect possible feedback effects that arise
from the rest of the world.
Should the Federal Reserve unilaterally ease U.S. monetary policy,
the world financial markets would tend to lose confidence i n our commitment to combat inflation, relative to the confidence that i t holds i n
the anti-inflationary commitment of other major countries. A s a result,
the currency composition of worldwide financial asset portfolios would
reflect such a shift. There would be a depreciation of the dollar—which
is inflationary—and the further consequence of exacerbating the
already excessive global monetary and financial uncertainty which, as
I have mentioned, undermines business confidence and investment i n
the world.
So we would get slower economic growth, fewer productive jobs,
more inflation, and, of course, increased political pressures for ever
more interference by government i n the economic svstem. This is a
vicious circle which can inevitably lead to chaos and totalitarianism.
We urgently need to understand the fact that the exchange rate
between the dollar, the mark, and the ven is the most important price
relationship i n the world. I t is too little understood that our national
interest i n achieving a sound domestic price and economic performance is closely intertwined w i t h the relative stability of the dollar's
foreign exchange value i n terms of other major currencies. This reality implies a l i m i t on the scope for independence of U.S. monetary
policy.
T u r n i n g now to U.S. fiscal policy, we should also realize that the
concept of a full-employment surplus, or deficit, is a dangerous one.
The main reason is that we simply have not found a viable wav to
wind down or fine-tune Government tax and spending programs i n a
timely fashion.
As a result, interest yields on fixed interest-earning assets, such as
Government securities, are more attractive to savers than the prospective profits f r o m inherently more risky productive investments, and
at such time as the private economy would otherwise resume higher




59
credit demands for financing additional investment capacity they are
"crowded out."
Accordingly, instead of a rebound into productive economic growth,
we generate further inflation and either subsequent or simultaneous
recession.
Over many years our tax reforms and spending programs have responded to the demands of war and the compassionate concerns of
the American people. We have increased the tax burdens borne by
the earnings and profits of the most productive elements of our economy—both labor and business—while we also, in effect, have increasingly subsidized less productive sectors.
When you tax work or production, you get less of it. When you
subsidize nonwork you get more of it. So the long-term impact of our
fiscal policy approach has also contributed importantly to slower
economic growth. I am sure that the Congress is well aware that our
productive investment is now falling far short of what is required
to insure the sustained rise of l i v i n g standards for America's posterity.
A case i n point is that of Britain. The Bank of England's Quarterly Bulletin of March 1976 shows that from 1960 to 1974 the
before- and after-tax real rates of return on capital employed i n the
British economy plummeted from 13 percent to 4 percent per annum
on a pretax basis, and from about 10 percent to a negative 4 percent
per annum on an after-tax basis.
The commitment to invest requires the reward of profit. I n the case
of B r i t a i n we need search no further to understand why the United
Kingdom has just reported its highest postwar unemployment rate—
i n spite of the so-called "social contract" which holds down wages—
while its inflation rate remains i n the double-digit range.
To avert such a future scenario i n our own country, we should reduce the taxes that Government takes away from American producers,
and we w i l l thereby provide incentives to increase the national
output. A t the same time, however, we must remain cautious concerning the extent to which we permit U.S. credit conditions to ease
so as to restrain inflation.
Accordingly, I believe that the ideal policy mix for the United
States involves a combination of reduced tax rates, targeted i n such
a way as to provide increased incentives to work, to invest, and to
save; and to maintain a reasonable degree of monetary policy restraint so as to reinforce domestic and foreign market confidence i n
the commitment of our authorities to eliminate inflation.
Such a U.S. policy approach could more readily be harmonized
w i t h that of Germany; i t is, indeed, basically the same as the
policy approach of that country. I am confident that such a U.S. approach would lead toward the further result that the foreign exchange
performance of the dollar would also improve. I might note that this
policy-mix formula is the precise opposite of that which was recommended bv our economic mini summit in late 1974.
I n conclusion, I respectfully recommend that the Congress approve
the proposed amendment of the I M F Articles of Agreement. However,
I also urge that the Congress insert new language i n the bill, S. 3454,
which instructs the administration and the U.S. Governor of the Fund
to assign a very high priority to the achievement of new understandings and cooperative arrangements between ourselves and major coun-




60
tries, so as to improve the coordination and commonality of stable
domestic economic conditions along w i t h a more orderly international
monetary performance.
As Treasury Secretary Simon and others have correctly testified,
a steadier exchange rate performance requires an underlying international convergence of internal economic conditions. However, a f u r ther indispensable requirement is the restoration of a reasonably sound
U.S. economic performance. The attainment of this twofold fundamental condition is a necessity to maintain reasonable stability of
exchange rates regardless of whether the international monetary
system is based on a fixed exchange rate or a floating exchange rate
regime.
I n time, and w i t h a reasonable degree of success i n this very important endeavor, I believe that a new par value system centered on
a fixed SDR might then be established which the world marketplace
would endow w i t h credibility.
Thank you, M r . Chairman.
[Complete presentation of M r . Birnbaum follows:]
S T A T E M E N T OF E U G E N E A . B I R N B A U M , V I C E P R E S I D E N T A N D C H I E F
T H E F I R S T N A T I O N A L B A N K OF C H I C A G O

ECONOMIST,

Mr. Chairman and member of the International Finance Subcommittee of
the Senate Banking Committee, it is a privilege to have been invited to testify
concerning S. 3454, a bill to amend the Bretton Woods Agreement Act. I fully
support the proposed amendments to the I M F Articles of Agreement, but will
later suggest that additional steps be taken to ensure a more stable world
monetary order.
When I testified previously with respect to this bill at the hearings of the
Senate Foreign Relations Committee on June 29, I commented that it was
unclear how a floating SDR could be adopted as a future standard for the
international monetary ssytem in the event that a high majority of the membership of the I M F should eventually desire to shift from floating rates to a
par value system based on the SDR.
Having completed further research on this issue, I now conclude that the
proposed revisions of the I M F Articles contain nothing explicit to preclude the
possible future adoption of a substantially redefined SDR, including even an
SDR that conceivably could be defined on the basis of fixed official par values
of national currencies.
I should now like to comment on some other important issues:
First, the Congress should not expect too much in relief from the present
international monetary turmoil if the new I M F arrangements are adopted.
Second, in my judgment, the currently existing international monetary system
is unsatisfactory. Indeed, the current regime is significantly inferior to the
system that existed before August 15, 1971, although that former system was
not perfect by any means.
Until the onset of floating exchange rates in 1973, countries had enjoyed
much faster rates of expansion of their sales abroad than sales to their home
markets. This made foreign trade a maior propulsive force in economic growth.
Now the risks and uncertainties in creating capacity to produce goods for
export have become an important factor in the worldwide erosion of long-term
business confidence and, hence, of economic expansion. As a result, I cannot
be sanguine about future prospects for sustained economic growth and the
continuation of steadily rising world living standards.
Third, I believe that Lenin was right when he said that the best way to
destroy the capitalist system is to debauch the currency, and that the principle also applies to the global market economy. The world market system also
requires a relatively stable "world money." While it is true that a world money
does not literally exist, we can approach such a condition if it is possible to
establish long-term confidence in the relative stability of exchange rates between
the most important currencies of the non-Communist world. I would include
in this list at least the dollar, the German mark, and the Japanese yen. Were
such confidence to exist in these exchange rates, these currencies would serve




61
as close substitutes for one another, and, in the aggregate, would then function
as the basic monetary standard of the world market system. I n the absence of
greater exchange rate stability between these major currencies, the non-Communist world will inevitably face increased political divisions. I believe that
market confidence in the relative stability of major exchange rates is essential
to the continued preservation of freedom and democracy in the world.
No international monetary regime, whether founded on fixed or floating exchange rates, can function satisfactorily unless the United States itself restores
internal economic conditions of reasonable stability and noninflationary growth.
Few would quarrel with this judgment, but there are wide differences of view
as to the correct policies to attain it. I should therefore like to present my views
on what I believe is a proper policy approach for restoring the U.S. economy to
a sustained healthful condition.
With respect to monetary policy, I believe that the monetary policy recommendations made by the economic summit of leading American economists in
the Fall of 1974 were wrong because, by implication, they were premised on an
invalid assumption that the United States is a closed economy. Many leading
economists continue to recommend easy money policies as if Fed operations can
wholly neglect possible feed-back effects that arise from reactions of the rest of
the world. The U.S. is not a closed economy; only the world is a closed economy.
When we surprised the world by devaluing the dollar in February, 1973 for
the second time in 14 months, we undermined foreign confidence in the commitment of this country to maintain the foreign exchange value of our currency. I n
the eyes of foreigners, as Lenin might have observed, we debauched our currency.
Foreigners then shifted the composition of their financial asset portfolios from
dollars into instruments denominated in currencies they continued to trust, e.g.,
the German mark, the yen, and the Swiss franc. As a result, Eurodollar interest
rates shot up and the effects were transmitted to our own borders. U.S. interest
rates quickly followed suit, stock market values sank, and the current era of
generalized monetary and financial uncertainty began. We have yet to fully
recover from this trauma.
This experience is but one illustration of how the international repercussions
of unilateral U.S. policy decisions can be perilous. The fact is that the dollar is
a global money, and that Federal Reserve monetary policy is not (at liberty to
neglect that fact. Should the Fed unilaterally ease monetary policy, the world
market would tend to lose confidence in the U.S. commitment to combat inflation
relative to the confidence it holds in other major currencies. The currency composition of financial asset portfolios would reflect this shift, with the consequence of a depreciation of the dollar—which is inflationary—and the further
consequence of greater global monetary and financial uncertainty which, as
I have mentioned, undermines business confidence and investment on a world
scale. So we get slower economic growth, fewer productive jobs, more inflation,
and, of course, increased political pressures for more government interference
in the market economy.
This is a highly complex subject, and I feel obliged to limit my testimony.
However, if the Subcommittee will permit, I should like to insert in the record
at the conclusion of my prepared statement a brief analysis concerning problems
of measuring the U.S. money supply under floating exchange rates, which was
published in the Wall Street Journal of May 19, 1976.
Turning now to the bottom line of what I believe our monetary policy should
be based upon, I suggest that under floating exchange rates we no longer focus
as much attention on arbitrary statistical measurements of what we define as
the money supply. Rather, our monetary policy actions should air more directly
toward the stabilization of the price level. This, too, ^involves measurement
problems, but we must avoid attaching too much importance to the increasingly
unreliable performance of the so-called domestic monetary aggregates.
We need to understand that the exchange rate between the dollar, the mark,
and.the yen is the most important price relationship in the world. I f this relationship can be effectively restored to a condition of relative stability ft would,
among other things, also correspondingly improve the reliability of measurements
of the money supply as targets for economic policy. I t is too little understood that
our domestic price and economic performance is closely intertwined wTith the
relative stability of the dollar's foreign exchange value in terms of other major
currencies.
Our internal monetary policy should be harmonized more closely with at least
that of Germany and Japan. We need to aim for a commonality of internal monetary conditions within this massive economic area. I t is only if such a condition

76-795 O - 76 - 5




62
can be achieved that the maintenance of relatively stable exchange rates between
the dollar, the mark, and the yen can be attained, along with our own requirement for a satisfactory domestic price and economic performance.
I f our internal growth, employment, or price performance should prove unsatisfactory, we shall have to approach these problems in cooperation with our
major economic trading partners and allies. This may at times require some
difficult compromises, particularly if the national political policy requirements
of the major nations are significantly disparate. Nevertheless, compromise we
must; since the alternative may well be to undermine financial, business, and
consumer confidence and, thereby, to create a remedy even worse than the
disease.
Turning now to U.S. fiscal policy, we must realize that the concept of a full
employment surplus (or deficit) is dangerous. The main reason is that we simply
have not found a viable way to wind down or fine-tune government tax and
spending programs in a timely fashion. As a result, at such time as the private
economy may begin to resume higher credit demands for financing productive
investment, lingering budget deficits may "crowd it out." Accordingly, instead
of resuming productive economic growth, we may generate further inflation and
either subsequent or simultaneous recession.
Over many years our tax reforms and spending programs have responded to
the demands of war and compassionate concerns of the American people. We
have increased the tax burdens borne by the earnings and profits of the most
productive elements of our economy—both labor and business—while we also,
in effect, have increasingly subsidized less productive sectors. When you tax
work and production, you get less of it. When you subsidize non-work, you get
more of it. The end result contributes to slower economic growth, with productive
investment now falling far short of what is required to ensure rising living
standards for posterity.
A case in point is that of Britain. The Bank of England's Quarterly Bulletin
of March 1976 shows that from 1960 to 1974, and before- and after-tax real rates
of return on capital employed by industry plummented from 13.4 percent to
4.0 percent on a pre-tax basis, and from about 10 percent to a negative 4 percent
on an after-tax basis. There is little need for further explanation as to why
Britain has just recorded its highest postwar unemployment rate in spite of
the so-called "social contract" which holds down wages, while inflation remains
in the double-digit range.
To avert such a future scenario in this country, we should reduce the taxes
that we take from producers. At the same time, however, we must remain
cautious concerning the extent to which we may permit credit conditions to
ease so as to restrain inflation.
I believe it follows from the above analysis that the ideal policy mix for the
U.S. involves the combination of reduced tax rates, targeted in such a way as
to provide increased incentives to work, to invest, and to save; and to maintain
a reasonable degree of monetary policy restraint so as to reinforce market confidence in the commitment of our authorities to eliminate inflation. Such a policy
approach could be readily harmonized with that of Germany, with the further
result that the foreign exchange performance of the dollar would also improve.
I t might be noted that this policy formula is the precise opposite of that which
was offered by our economic mini-summit in late 1974.
I n conclusion, I respectfully recommend that the Congress approve the proposed amendment of the I M F Articles of Agreement. However, I would also
urge that new language be inserted in the bill (S. 3454) to instruct the Administration and the U.S. Governor of the Fund to assign a very high priority to
the development of new understandings and cooperative arrangements between
major countries so as to improve the coordination and commonality of domestic
monetary conditions. I f this can successfully be achieved, we may hope to see
more stable exchange rate relationships between the non-Communist world's
most important currencies. With greater experience, these arrangements might
then be extended so as to encompass a more broadly based area in the effort to
attain global monetary stability.
As Secretary Simon and others have correctly testified, a steadier exchange
rate performance requires an underlying convergence of internal economic
conditions. This holds true regardless of whether the international monetary
system is based on a fixed exchange rate or a floating exchange rate regime.
I n time, and with a reasonable degree of success in this very important endeavor,
I believe that a new par value system centered on a fixed SDR might then
be established which the world marketplace would endow with credibility.




63
S U P P L E M E N T A R Y R E M A R K S B A S E D ON Q U E S T I O N S R A I S E D BY SENATOR STEVENSON
P E R T A I N I N G TO H E A R I N G S ON S . 3 4 5 4 , AS P U B L I S H E D I N T H E CONGRESSIONAL
RECORD OF A U G . 5 , 1 9 7 6
1. H O W TO " M A N A G E " FLOATING E X C H A N G E RATES

The I M F Executive Directors have issued guidelines concerning the management of floating exchange rates. I n essence, the guidelines constitute a generalized statement of good international monetary conduct. However, the statement is largely devoid of clear rules or standards against which the actual
conduct of countries can be effectively judged.
Much is made of a need for "firm multilateral surveillance" by the Fund
in the proposed revision of the I M F Articles. However, it remains to be seen
whether there is any meaningful way to apply such surveillance. I f you have
a world in which some countries are intervening to steady their exchange rates
while others are not, what criterion can there be to determine whose rate may
perhaps have moved out of line? I know of no method by which to make meaningful judgments in this regard. Further, even if the I M F somehow makes
such determinations, what sort of action could it then effectively implement?
At this point at least, not much is really known about how the floating exchange
rate regime should be managed.
2. T H E F U T U R E ROLE OF GOLD

The future of gold as a monetary asset represents another question mark. I n
principle, it might be nice to be able to do without the barbaric relic of the past,
though a lot of thoughtful people are not convinced that we can, in fact, do
a better job in its absence. The fact that the Group of Ten limited its agreement
not to peg the price of gold to a period of only two years reflects the existence
of a divergence of views concerning the role of gold in the world monetary system. Another manifestation of this basic policy difference was the purchase of
gold from the I M F by the Bank for International Settlements ( B I S ) , which it
then resold to a member country of the Fund. I am told that this was done under
an interpretation which holds that since the entire international monetary system constitutes an accumulation of legal violations, some countries feel they
can do what they please with respect to gold.
Some gold holding and gold producing countries may have a vested interest
in preventing the private price of gold from declining. They might therefore
attempt to form a "gold bloc." However, the U.S. holds a substantial gold hoard,
so that it could potentially create major disturbances in the gold price should
it have the will to do so.
Whether gold will be phased out as a monetary asset is ultimately a political
decision. For example, a future closely knit European bloc, including Germany,
could possibly prevent it if, for some reason, it decided on such a course of
action.
Aside from such considerations, I might note that the combination of current
political problems in South Africa, economic and financial difficulties in Soviet
Russia, and the I M F program for selling gold over the next few years, is exerting a depressing influence on the price of gold for the short to intermediate term.
Over the longer run, however, there may be new constraints on supply which
might then lead toward a resumption of a rising gold price trend.
3. T H E

SDR

Relative to official holdings of gold and reserve currencies, it is clear that the
SDR is not now the principal international reserve asset. After I M F quotes
may be increased, as now proposed, total Fund resources will amount to perhaps
only 4 percent of world trade; that ratio was four times higher about 30 years
ago. So whether the SDR does, in fact, become the principal international reserve asset will depend on future decisions of the I M F member nations. At this
juncture it is obvious that the Jamaica Agreements do not ensure that SDRs
will, indeed, eventually become the principal reserve asset of the international
monetary system.
4.

THE

NEED

FOR A

ONE-THIRD

INCREASE

IN

IMF

QUOTAS

The proposed one-third increase in I M F quotas represents a small, though
helpful, addition to world monetary resources. As compared with existing totals




64
of world liquidity, the grand total of I M F resources is relatively small. However, if the Fund is to continue to carry out its important function of extending
conditional credit to countries, that is, credit which is preconditioned on the
adoption of sensible, though sometimes politically difficult, economic policies on
the part of borrowing countries, then it needs liquid resources to be a credible
and effective institution.
5. W H E T H E R

T H E FUND I S

BECOMING A N

AID-GIVING

AGENCY

I do not agree that the I M F is gradually being converted into a foreign aid
agency. As a case in point I would note the recent $5.2 billion short-term credit
that was extended by major central banks to the United Kingdom. I f the U.K.
is unable to fully repay this credit after six months, it is anticipated that it
will then be transferred to the I M F where Britain will be subject to economic
policy preconditions. Thus, the Fund may prove helpful to all of its members,
developed and underdeveloped.
With respect to the so-called Trust Fund being set up out of I M F gold sales,
one should consider the size of these resources to gain a proper perspective. I n
such a light the amount of funds involved are too small to be regarded as a significant potential source of inflation. Other issues concerning the establishment
of an orderly world monetary system are too important to allow— the Trust
Fund issue to become a serious diversion.
6. " A R E T H E R E S U F F I C I E N T CONSTRAINTS ON CREDIT CREATION I N T H E EURO-CURRENCY
M A R K E T S TO I N S T I L L CONFIDENCE I N T H E F U T U R E S T A B I L I T Y OF A N I N T E R N A T I O N A L
M O N E T A R Y S Y S T E M H E A V I L Y DEPENDENT ON T H E DOLLAR?"

This question is related to one asked by Senator Percy during my testimony
before the Senate Foreign Relations Committee. Senator Percy asked if I , "as
a banker, believe that the Euro-currency market contributes to international
inflation? Do you believe that there is a need for controls of the Euro-currency
banks?"
My response to Senator Percy was overly concise. I said at that time:
" I f a truly effective global system for imposing minor reserve requirements on
Euro-currency deposits could be worked out, I could possibly support it, not because I believe the Euro-currency market is a dangerous engine of inflation, but,
rather, because I believe that if central banks hold a small amount of reserves
of these Euro-currency banks, then, ipso facto, they are going to be held accountable and more responsible for what goes on in those markets . . . . I believe, so
far as the contribution of these markets to world inflation is concerned, that it
has been grossly exaggerated
"
I n order for controls or even minimal reserve requirements on Euro-currency
deposits to be effective, they would have to be imposed in an airtight global system, or else the Euro-currency markets would tend to move away from where
controls are imposed to where controls are not imposed. For example, if the Bank
of England were to impose new regulations on the Euro-currency banks located
in its jurisdiction, then the affected institutions could easily migrate elsewhere
in the world to be free of such interference. Given the longstanding sound traditions of British banking, a shift away from London would be likely to result in
a deterioration of the Euro-system, rather than in an improvement of it. Accordingly, this explains my reference to the required existence of "a truly effective
global system" for imposing such restraints. However, in my judgment, such a
system would be Utopian and academic in today's world. I do not believe that
an airtight global system for regulating the Euro-currency markets really lies
within the realm of practicality.
There appear to be two important problems: First, such a global system would
require the joint participation of most, if not all, of the 128 member countries
of the International Monetary Fund. I n today's world many of these countries
would probably not command the trust of the total world community to manage
the operation of Euro-markets to the satisfaction of all interested parties.
A further requirement to close possible loopholes in such a hypothetical global
network would be that every participating nation would have to legislate prohibitions against its nationals engaging in Euro-currency transactions in any
country which is not a participant in the system. But even if ths were done, it
is doubtful that the authorities of all the countries would, in fact, hold the power
to effectively implement such a legislative restriction. Therefore, my response to
Senator Percy was somewhat misleading, for although I stand by the logic




65
underlying my answer, the premise upon which such a system would be based
is purely hypothetical and, it would appear, not achievable in today's world.
Turning now to the part of Senator Stevenson's question concerning whether
constraints on credit creation in the Euromarkets are sufficient to instill confidence in the international monetary system heavily dependent on the dollar, I
would respond as follows:
I n my opinion, the expansion of the Euro-currency markets should not be
viewed as independent of the monetary and credit policies pursued by the world's
major national monetary authorities. The growth of the Euro-currency markets
represents the share of world credit expansion which can be captured by the
Euro-market institutions on the basis of their superior efficiency, lower costs of
operations, and the existence of clients who find i t convenient to conduct transactions with such a highly internationalized system.
To oversimplify, the U.S. Federal Reserve and, say, the German Bundesbank
together adopt policies which determine the scope by which credit may expand.
These policies imply some limit on the growth of credit, and there is then competition betweem domestic banks and other financial institutions and the Euromarket institutions in the sharing of the available potential for credit expansion. When seen in this perspective, it is clear that the growth of Euro-currency
market credit mainly constitutes a share of a given pie, rather than a primary
source of world credit expansion. I f the Euro-banks try to expand to capture loam
demand from "domestic" banks, they must charge lower interest rates. But they
may not be able to expand their deposits for that would require paying higher
interest rates. Without such additional deposits, the Euro-banks have no extra
funds to lend out. So I see no necessity for controlling the expansion of Eurocurrency credit. Rather, in the example I have given, the ultimate constraint on
credit is determined by the policies of the Fed and the Bundesbank.
I remain confident in the stability of the Euro-currency system. As a case in
point, I might note that in 1974 it is estimated that Italian banks which participated in the Euro-currency system lost as much as four fifths of their gross
Euro-dollar liabilities. Yet, with very minimal support from the Bank of Italy,
none of these banks failed. They were able to wind down their Euro-currency
assets roughly in proportion to their loss of liabilities, thus demonstrating the
underlying strength of the system to withstand a major shift of funds. I might
also note that the September 1974 statement of the central bank governors who
attended a meeting of the Bank for International Settlements ( B I S ) in Basel,
Switzerland, provided further reassurances to the Euro-currency markets. The
central bankers indicated their readiness to cooperate and stand behind the
stability of institutions participating in the Euro-currency markets.
As a matter of fact, it is important to bear in mind that the principal participating Euro-currency banks are those whose home offices are mainly located
in but a few major countries, principally the United States, the United Kingdom,
Germany, and, to a lesser extent, perhaps one or two other major countries.
Accordingly, the logistical problems of cooperation between the central bank
authorities of those countries is by no means one of unmanageable proportions.
To conclude, I believe, in competition, and the existence of the Euro-currency
markets has had a beneficial effect in improving the efficiency of banking in the
entire world. A lot of countries, businesses, and banks have benefited from the
Euro-currency markets and are highly confident as to its strength and stability.
I personally share in that assessment.

[From the Wall Street Journal, May 19,1976]
DOUBTS ABOUT FLOATING RATES . . .

(By Eugene A. Birnbaum)
The starting point for most discussions of monetary policy is of course a
nation's "money supply." But the very idea of a money supply may be outmoded
and inadequate for today's times because it was derived from experience during
a much less complicated era of fixed exchange rates.
An important though neglected fact is that the "total money supply" of a country is an abstraction: jt has no measurable empirical counterpart. To be conceptually complete the aggregate money supply of a country should in theory
incorporate the value of all forms of moneyness, however and wherever held.
Characteristics of money are possessed by many things, financial as well as real.




66
D o l i n g World W a r I I and i n early postwar years, cigarets, chocolates, chewing
gum, and even silk stockings functioned as money in some places of the globe.
Since the intrinsic value of flat paper money is zero, its moneyness accounts
for the totality of its value. Some value for moneyness also attaches to assets
readily convertible into money: time or savings deposits, bonds, stocks, commodities, etc. Their moneyness varies, depending on circumstances, but i t correspond*
ingly contributes to the worth of these assets.
A CUMULATIVE SUM

To aggregate the total money supply, domestic currency and checking accounts
would, of course, be included, as would the cumulative sum by which all other
holdings of financial and real assets are valued above their intrinsic worth by
virtue of their moneyness. The same principle applies even to assets held abroad.
I n the absence of a measure of a nation's "true" aggregate money supply, an
array of largely arbitrary statistical "proxies" has been invented. The Western
world's monetary authorities compile these, publish, and make use of them as
guides for policy. Policymakers, economists, politicians, and journalists who comment about the "money supply" are, thus, i n reality, referring to the performance of statistical proxies.
I n the United States, at least seven such proxies, identified as M l , M2, through
M7, are regularly compiled. The most closely scrutinized are M l (the sum of
currency and privately held demand deposits in domestic commercial banks),
and M 2 ( M l plus commercial bank savings and time deposits held by the public,
excluding large negotiable certificates of deposit).
The current fixation on "money supply" as the prime target, progress report
and scorecard for the nation's economic policy derives from the landmark study
by Milton Friedman and Anna J. Schwartz," A Monetary History of the United
States: 1867-1960." National Bureau of Economic Research (Princeton University Press, 1963).
Covering a period of 93 years, that study found a relatively stable relationship
between the growth of the M2 proxy and U.S. gross national product statistics
(GNP).
The principal theoretical implication for policy of the relationship found by
Friedman-Schwartz is that control of M 2 by the Federal Reserve w i l l determine the course of GNP, and that i f such control is properly executed, little
or no attention need be paid to other economic policy instruments, like government deficits or surpluses, interest rates, or exchange rates. I t is even argued by
monetarists that rates should be left alone to fluctuate according to the interplay
of market forces, while steady-state expansion of M2—achieved by appropriate
interventions by the open market desk of the New York Fed—operates inexorably
to achieve the M2-ordained GNP objective.
There is no heed to quarrel with the actual statistical findings by FriedmanSchwartz for the era from which they were drawn. But during about 80 of the'
93 years covered in their study there were fixed exchange rates for the dollar.
Accordingly, i t is legitimate to question whether theories based upon that research are applicable to the dramatically different current conditions of worldwide floating exchange rates. Indeed, the Friedman-Schwartz study, which covered several periods of instability of money and income under both flxed and
floating rates, included the years 1867-1881—one of the rare extended periods
of floating exchange rate in U.S. monetary history—as one of those showing
"appreciably greater instability of the year-to-year change in both money and
income."
There are now definite grounds for skepticism concerning the assumed stability
of the relationship between M2 and GNP under floating exchange rates. For
one thing, shifting exchange rates impose upward pressures on short-term interest rates in the depreciating currency, while depressing them (or slowing their
rise) in the appreciating currency. Changing interest rates, correspondingly,
have variable effects on the whole gamut of alternative measured proxies for the
aggregate money supply.
I n other words, rising or falling interest rates and exchange rates may move
money from one M to another, as they induce national and international shifts
between currencies or demand deposits, time deposits, Treasury bills and bonds,
stocks, commodities, etc., reflecting changing preferences between competing
forms of holding money—even though the total "moneyness" of a national economy may be unchanged.
Further, to the extent that monetary authorities may concentrate attention on
controlling the growth of one or another M, their interventions may correspond-




67
ingly alter exchange and interest rates, causing further instability among the
various Ms. I f these relationships behave erratically, it's difficult to imagine a
stable relationship between M proxies and the GNP.
This is not to denigrate the many valuable contributions of the FriedmanSchwartz National Bureau study. But at the very least it is now appropriate to
be aware that major question marks arise as to whether the Friedman-Schwartz
findings are relevant under today's floating exchange rates. Indeed, as statistical
evidence mounts, increasing attention is being paid to the fact that the measured money proxies currently bear unstable relationships with respect to each
other and the GNP. Accordingly, official monetary policy intent on adopting
steady growth of will o' the wisp money supply proxies could touch off instability
of the GNP—the very opposite of monetarist beliefs.
ONE I M P L I C A T I O N

One implication of this analysis is that the restoration of some semblance of
relatively stable exchange rates will be necessary before monetarist findings of
a bygone era may again be relevant. I t could well be that only under the inherent disciplines of general exchange rate stability are structural conditions
created which reveal steady relationships between money supply proxies and corresponding measures of national economic activity—as found by FriedmanSchwartz.
I f this is correct, as I strongly suspect, then an important implication for
monetary policy follows from i t : The possibility of using Federal Reserve monetary policy to achieve GNP objectives is subject to the limiting constraint that
major foreign exchange rate relationships of the dollar remain relatively undisturbed. Accordingly, U.S. monetary policies would require a degree of synchronization with those of other major countries—at the very least with those of West
Germany—so as to avert disturbing exchange rate fluctuations which otherwise
could undermine the stability of U.S. monetary and national income relationships.
The Federal Reserve has generally resisted loud and frequent clamors for'
more aggressive intervention to steady the growth of proxies for the monetary
aggregate. There have been repeated warnings about deviations from preordained
money growth targets. I n spite of these complaints, the economic recovery, so
far at least, has made continuing progress. Under today's floaty exchange rates,
there could be much wisdom in the Fed's defiance of its critics.

Senator S T E V E N S O N . Thank vou, Mr. Birnbaum. I didn't, in my introduction, do justice to any of you and in particular I didn't mention
the lenotfhy distinguished public services many of our witnesses have
contributed.
I think this is one of the most remark-able panels that I have been
privileged to listen to since I came to the Senate.
But unhappily my privilege is about to end. I have just been informed by the leadership that the Export Administration Act is about
to be brought up on the Senate floor and I have to manage that act.
So we w i l l continue with the panel, and Senator Proxmire is of
course the chairman of the f u l l committee, and he has kindly agreed
to chair these hearings.
But I apoloorize to you and I personally regret i t very much. I t
would be helpful to me as well as to the Confess to hear the rest of
you, but I am groins: to have to excuse myself to leave to prepare to
manage the legislation on the floor of the Senate.
Our next witness is M r . Koosa.
STATEMENT OF ROBERT V. ROOSA, PARTNER, BROWN BROS.,
HARRIMAN & CO.
• , Mr. ROOSA. Thank you Mr. Chairman.
I wish vou well i n your management and I hope before long you
w i l l be helping to manage the successful passage of the legislation we
are considering here today.




68
I am delighted to have a chance to appear w i t h this group, before
this committee to endorse the legislation that is proposed and to suggest that there w i l l , after this legislation, as there has been since
Bretton Woods, continue to be many problems that w i l l not have been
f u l l y solved by a single action contemplated at any one time.
I would like i f I may M r . Chairman, to introduce m y own f u l l
statement for the record and summarize what I t r y to say there very
briefly.
Senator PROXMIRE. W i t h o u t objection your statement w i l l be
printed i n f u l l for the record i n the record.
A n y other panel member who wishes may do that also.
M r . ROOSA. T h a n k you.

The first point I make is that there is continuity i n the evolving
money situation of the world. A t times i t runs ahead of events ana
tries to shape a framework w i t h i n which events can then move.
This time i t is the other way around. Events have r u n ahead of
the system as previously established and i t is time now to fabricate a
set of legitimizing arrangements which w i l l not only provide f o r
greater assurance of orderliness i n the way i n which we proceed w i t h
new implementations, but also w i l l be flexible enough to leave room
f o r the further kinds of adaptation which the system w i l l surely need.
I wouldn't want to identify myself chapter and verse w i t h everyt h i n g Eugene Birnbaum has said, but I certainly applaud his insistence on the fundamentals and the recognition that m time the w o r l d
could very well tear itself apart i f all currencies were freely floating
without some central convergence and that that central convergence
w i l l , I hope, emerge under the contemplated arrangements i n time
between the Deutsche mark, the yen, the dollar. I t is a position that
I have urged since long before the events even of August 15,1971, so
I have no trouble i n endorsing that aspect of M r . Birnbaum's sugI do believe f o r the present that i n a world of such widely divergent
patterns there is no alternative to continuance of a system that is
essentially one of floating currencies as among the major countries.
A s we all understand, many of the other countries who are not i n a
position to qualify as members of the leading industrial circle are
themselves floating only i n the sense that they peg to one or another of
these leading currencies and occasionally adjust their peg.
B y and large, they determine their own performance by what happens to the leading currencies so that we s t i l l have a mixed system, and
I would expect as time goes by, i t w i l l be possible i f there is recognition
of the need, the overriding need to give p r i o r i t y to domestic stability
w i t h i n individual leading countries, that there w i l l be an opportunity
for the closer harmonization among these principal industrial countries that M r . Birnbaum describes.
I t h i n k another aspect of the new arrangements that I find very
encouraging i n contrast w i t h testimony of the Congressman f r o m
whom we just heard, is the progress toward multila/teralizing the consultation and to some limited degree the decisionmaking process.
One of the shortcomings of the International Monetary F u n d and
its effectiveness over the years has arisen f r o m separation i n distance
and i n responsibility between the executive directors domiciled i n
Washington and .the governments they represent i n the. 120-bdd countries of the w o r l d that are .now members of t h e .Fund. •
^




69
I n think the Jamaica procedure has been an important step i n trying to reconcile that continuing conflict between f u l l hearing of a l l
members and the need for a smaller group to thresh out the final details
and specific action.
The process of evolving the Jamaican agreements proceeded along
the lines of a pattern, now tested i n a preliminary way, that resulted
i n ultimate dependence on at least the vote delivering capability of
only 20 men representing of course i n fact, all of the members of the
Monetary Fund.
B u t each of them being principal officers of their own governments,
they were capable therefore of acting w i t h a degree of responsibility
and immediacy which has not often been possible i n the executive
board of the Fund itself.
So I regard the development of the interim committee and ultimately of the executive council as an important new development i n
the evolving international monetary system.
I think i t is important also that the SDR has been given a more
distinct role i n the Fund. I n my view i t is important that gold has
been dethroned but not exiled.
Gold w i l l still have a role for anyone who wants to hold it. Obviously
i t has had intrinsic attraction to mankind for generations and we are
not going to remove i t by a simple act of legislation.
B u t I think i t has been shifted into a position where its potential for
harmful disruption of the monetary system is now largely gone.
I think i t is important too, that the position of the dollar has been
redefined. There is never going to be any complete avoidance of dependence on the dollar so long as we remain the dominant industrial
power i n the world, w i t h many countries dependent on the dollar as a
standard of value and many more using i t as a medium of exchange.
B u t I do feel that the mechanical requirement that the dollar be i n
effect the standard of value for the members of the Monetary Fund
was imposing an undue burden and periodic strain on our own performance, a distortion which did not reflect our own basic economic
conditions.
I n this proposed legislation the dollar is no longer the standard of
uniform value for all transactions i n the Monetary Fund, instead
being replaced by the SDR. The SDR does have the advantage i n a
world of such great instability of at least providing that closer approach to a relatively stable norm that is just arithmetically implied
when you depend on an average among several rather than depending on only one currency or one commodity.
B u t I -think the final aspect of all of this that runs through comments about the sale of gold and use of the trust funds and so on that
I would like to stress is that i t has been possible, I believe, during the
course of all these negotiations to avoid a great risk so far, and that
is the risk that the I M F would be converted into an aid or development financial institution.
We have got institutions for that purpose; the separation should be
kept. I f the Monetary Fund is to have a hope of evolving ultimately
into the role of a—'albeit w i t h some constraint—a central bank for
the world/economy, i t has to retain the separate identity that distinguishes i t f r o m aid-giving institutions*.
That is why I am gratified that there has been no. further Step i n
the direction o f l i n k i n g the Creation of SDR's to aid.




70
I think that would corrupt the strictly monetary concept of the
SDK. I do feel however tjiat the needs f o r aid as epitomized i n some
of this I M F action really point toward the need for more aggressive
U.S. Government support of the other Bretton Woods institutions:
The W o r l d Bank, the I D A , and the International Financial Corporation. I think i t is regrettable that there has been i n this area such a
sluggish response on the part of the United States.
I believe this is the area where, i f we are going to have a chance of
t
avoiding additional disruptive unexpected but chaotic influences on
the world monetary system, we and the rest of the developed world
are going to have to take more prompt action, more effective on a
larger scale, because the less developed countries are, through the
accumulating of more and more debt, building up more and more
potential for an unfortunate chaotic situation.
U n t i l they can match their debt exposures w i t h greater productive
capacity, the potential for the 100-odd less developed countries is
indeed still forbidding.
So I would conclude, M r . Chairman, by saying that I t h i n k the
legislation does what we need. I t moves on all fronts i n what I regard
as the right direction. I t leaves flexibility for future adaptation which
we w i l l also likely need and i t points toward comparable emphasis
on the support by our Government o f the other Bretton Woods institutions whose responsibilities are growing and which are not subject
to as much change i n their nature as we are now proposing for the
monetary fund.
[Complete statement follows:]




71
For Release on Delivery

THE JAMAICA AGREEMENTS
Testimony prepared for submission to the
International Finance Subcommittee of the
Senate Banking Committee on S.3454
on August 27, 1976
by Robert V . Roosa, Partner
Brown Brothers Harriman & Co.

M r . Chairman,
I t is a pleasure to appear before this Committee again in the continuing sequence of deliberations on the evolution of the international monetary system. I stress the word "continuing" because the process of adapting
monetary arrangements to the needs of a dynamic world economy is neverending. At times there may be opportunities to introduce new arrangements
or procedures which can help to lead and shape the patterns of economic
change within and among nations. That is what happened at Bretton Woods
in 1944. At other times patterns of actual economic change may themselves
push beyond older monetary arrangements, requiring ad hoc improvisation
within the international monetary system. And unless such impromptu improvisations are soon to degenerate into chaos or conflict, new legislative
arrangements must rather promptly catch up with and legitimize them. The
legislation before you today is mainly of this second form.
While new problems will always be emerging in both the structure
and functioning of the international monetary system, and new adaptations
will be required to cope with these new problems, a periodic codification of
the essence of what has evolved in the design of international monetary relationships is essential. For monetary adaptations to economic change should,
to the fullest practicable extent, occur within a framework of guidelines designed in advance not only to assure that flexibility can in fact occur, but
also that whatever uses are made of that flexibility will not create new and
greater problems. The stakes are too great in today's interdependent world
to invite disorder by inaction.
The various provisions of this legislation, and the understandings
surrounding it, constitute a critically important advance in the search for a
suitable balance between money1 s role as master and as servant for the world
economy. The so-called Jamaica Agreements should be viewed in longer




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perspective as a combination of individually modest but collectively crucial forward steps in the progressive evolution of the world's monetary
arrangements. The legislation itself preserves what is essential in existing institutions; it affirms significant additions to those institutions,
and it provides further flexibility for future adaptation to change. Indeed,
coming amidst an unusual convergence of potentially disruptive forces in
the economic relations among nations, the legislation before you represents
a remarkable achievement in finding a common denominator among the problems and needs of those nations.
In considering this legislation, important as it is, however, it is
For even after its enactment,
necessary to guard against exaggeration.
the basics of international economic relations will remain very much as they
were before the recent round of improvisations began. That is, individual
nations will still pursue their own national objectives in economic policy.
Differences among nations in resources, in performance, and in objectives
will still create potentials for conflict or disorder in the flows of trade and
capital among them. The monetary system will still serve as a partial
check or discipline upon particular countries whose course is sharply divergent from the central tendencies prevailing among the others. Yet the system
will also be capable of supporting continuing economic expansion within and
among all countries.
Neither floating exchange rates nor a par value system can of themselves assure harmony among national economies as widely different as
Germany and Zaire, or the United States and India. But the forward steps
included in the Jamaica Agreements, and the casting aside of those vestigial
remnants from Bretton Woods that have become outmoded, will certainly
raise the prospects for stability with growth throughout the countries that
adhere to the International Monetary Fund. But no country can expect to
have stability provided for it by this or any other monetary system, nor can
it expect to be insulated from outside strains by any monetary mechanism.
Sustainable growth for any country within a framework of viable relations to
other countries will still have to depend, first, on reasonable stability in
the domestic performance of that country, and second, on the readiness of
each country to make suitable adjustments in its domestic performance when
its own prices, production, or trade have shot far out of line with those of
other closely related countries. An altered exchange rate (whether it floats
or is deliberately moved) can only rarely make up all the difference. There
is no escape from the hard realities of what the professionals call "the adjustment process." That is as true for Germany as it is for Zaire; as inescapable for the United States as i t is for India.
The various provisions of this legislation have been reviewed often




The various provisions of this legislation have been reviewed often
and will no doubt be repeated by others on the panel here this morning. I
propose to sidestep those details, and the various criticisms that can still
be made of them (for they are, of course, only compromises among many
differing national views and interests). Nor will I digress here into a dialectical discourse on the pros and cons of "managed floating." Perhaps my
role can best be to try to set the proposals as a whole in perspective — a
perspective that grows out of some twenty-two years on the Governmental
side of these evolving relationships and now more than eleven years of
viewing them from the private sector. I t seems to me that there are at
least five significant aspects and implications embodied in the arrangements
contemplated by this proposed legislation. Positive progress in the long
continuum of monetary development is made possible with respect to
(1) consultation for multinational surveillance; (2) the uses of Special Drawing
Rights; (3) the position of gold; (4) dependence on the dollar; and (5) the payments pressures on less developed countries.
1. Consultation. The ultimate source of genuine effectiveness
and orderliness within the international monetary system must come from
a willing understanding among nations, and from ready consultation when
misunderstanding develops, rather than from any set of mechanical devices, or from a mystical invocation of the power of free markets — though
I do not mean that mechanics are unimportant, nor that encouragement of
free market influences is undesirable. One persisting obstacle to understanding and consultation arises from the inherent conflict between the need
for representation by large numbers of participating countries, on the one
hand, and on the other, the difficulty of reaching a usable and timely consensus unless the number of participants can be manageably small when critical
issues arise. Peremptory action by a single nation is no satisfactory solution, as I believe the United States discovered on August 15, 1971.
The negotiations culminating at Jamaica have, in this respect,
broken new and promising ground. Several separate roles for various groupings and regroupings of countries have been implicitly acknowledged. There
is a place for consultation among a few of the leading industrial countries.
There is a place for parallel consultations among the less developed countries
all together, and in several sub-groupings. And all of these different groups
have in turn been, in effect, joined together through a group of delegated repre
sentatives, functioning within the structure of the International Monetary Fund
as the "Interim Committee.*' That Committee presently includes twenty
Finance Ministers or central bank Governors, about evenly divided between
those of the less developed and the more developed countries. It is expected
(and I would hope) that the Interim Committee will be transformed, in furtherance of the Jamaica Agreements, into a permanent Council. When that is
done, following ratification of the amended IMF Articles in accordance with




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the legislation you are considering, there may be greater assurance that all
voices will be heard, and that a working consensus will evolve, as major
issues affecting international monetary stability arise in the future.
It is through the Council, and its membership of officials from
the highest levels of Government, that the most meaningful results can be expected from the IMF "surveillance" that is central to the case-by-case approach to emerging future problems. To be sure, IMF staff surveillance can
and should include an ascertaining of facts, as well as the rendering of opinions.
But the articulation of practical recommendations, and the development of
common plans of support and of action, can only be the work of responsible
Ministers, speaking for their own Governments (and for those whom they
represent as spokesmen). That is why the Council can be more than just
another consultative body. It can bring to bear the inherent power cf many
Governments to reinforce the IMF itself in focussing attention on the repercussions which the actions of particular Governments, acting individually or
collectively, may have upon the functioning of the international monetary system.
2. Special Drawing Rights. Under the new Agreements the SDR
is recognized as the principal standard of value — though not yet the principal medium of exchange — in monetary relations among nations. This
standard is determined as a composite of the currencies of the sixteen
countries which each account for at least 1 per cent of total world trade.
By replacing the old dollar-gold price standard, the new arrangement
hinges the entire monetary system upon a standard which represents an
averaging of the differences among many currencies, and has the greater
relative stability, as a norm, which an averaging process inherently assures.
Although neither the amount of SDR's in existence, nor the degree of freedom in their use, yet permit their becoming a principal medium
of exchange among nations, the path toward that further objective will be
opened by several small steps within the Agreements. Obligations to the
I M F can be settled in SDK's. Transfers among nations can be made on the
books of the IMF in SDR's. And the IMF at its own initiative can exchange
SDRfs for the currencies of any member country. These are important
first steps in a long process that can be broadened as experience grows.
3. Gold. Under the Agreements, gold is dethroned as a standard
of value but is not exiled as either a reserve asset or as a limited means
for international monetary settlements. The time-honored attractiveness
of gold as an easily handled commodity of high intrinsic value is still recognized, for all who wish to hold or use it. But the potentialities of a gold
standard for creating or aggravating a monetary crisis — potentialities that
became so frighteningly actual as the world economy grew in scale and com-




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plexity — have been set aside.
To be sure, the arrangements are still flexible enough to allow
a powerful combination of countries, if one were to be formed, to attempt to
peg the price of gold and restore it to more active use as a standard of value,
at least for a segment of the international monetary system. That is a risk,
but I trust not a likelihood, in the present arrangements. In any event, the
arrangements specifically provide that gold is no longer to be used in meeting obligations to the International Monetary Fund, and useability at the IMF
is a necessary condition for acceptance of any asset as a standard of value
in today's environment.
4. The U. S. Dollar. International dependence on the dollar as a
medium of exchange continues, but the additional burdens formerly placed
upon it as a standard of value for all members of the IMF have now been r e moved. To be sure, a large number of countries continue, in effect, to peg
their currencies to the dollar, and to make necessary adjustments in their
own exchange rates by altering the pegs. To that extent, continuation of a
nominal "dollar bloc" is no doubt an inevitable concomitant of the enormous
relative size of the United States within the constellation of nations and of
the chaos that would result if all currencies (large or small) were floating
without any anchor.
Indeed the bulk of transactions among countries whose exchange
rates are floating (as well as a high proportion of transactions among the
countries whose currencies are kept within the "European snake") is still
carried out in dollars — at times with the effect of unduly depressing the
exchange rate of the dollar against other strong currencies. That is a disequilibrating tendency which will recur until more of the transactions of
other leading countries are invoiced in their own currencies — a change
which has already started with respect to the yen and the D - m a r k — and until
the SDH can be used mo re actively as an intervention currency in the foreign
exchange markets (at least for transactions among central banks).
There is at any rate now a growing recognition that the United
States is not itself promoting an undervalued dollar as a means of taking
undue trading advantage of other countries. Any sizeable reduction in the
dollar's role, as world trade and payments continue expanding, will probably
come only slowly, however, because such a shift will have to depend on
changes in trading practices and trading mentality which are not readily r e sponsive to mere legislative action.
5. The Less Developed Countries. The needs of less developed
(or developing) countries have been accorded a range of useful new facilities,




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under the Agreements, without yet compromising the appropriate monetary
role of the I M F . That is, so far as international agencies are concerned,
the extending of direct loans for continuing domestic requirements should,
in my view, remain the responsibility of Ihe World Bank, its affiliated institutions, and comparable regional and national development banks. The
International Monetary Fund should continue as the imperfect counterpart of
a central bank, furnishing the world's primary reserve asset and providing
only short-term financing to bridge temporary balance of payments shortfalls.
Under the Agreements, and in part in advance of them, the IMF's
capabilities for extending additional credits to assist countries through periods
of reserve losses attributable to crop failures, or natural disasters, or unusual circumstances, have been substantially enlarged. For two years, a
special oil facility also served to help both developed and developing countries
through a difficult initial phase of adjustment to the mutation in oil prices.
Modest additional provision has also been made on a continuing basis for an
interest subsidy account and for a trust fund to be created from the proceeds
of the IMF's sale of part of its gold. All of these are limited advances toward
coping with the serious payments problems confronting the non-oil producing LDC's, but all do go in the right direction.
One very great danger has been avoided. That was the risk —
a risk to which most less developed countries in their understandable eagerness for balance of payments assistance in the aftermath of 1973 have
seemed rather indifferent — that the SDR's would be used directly to grant
additional development aid (as outright grants or as long term loans). Such
a 'link" would, in my opinion, soon establish overwhelming pressure to
create additional SDR's as a means of extending aid. In effect, aid would
come through the legerdemain of money creation, bypassing explicit provision
in the budgets of the countries from whom the actual goods embodying that
aid would in fact flow. Once the SDR became subverted to this purpose, the.
hope of its establishing a unique and wholly unprecedented position as a manmade reserve asset, universally acceptable because its supply was solely
related to the world's fundamental needs for monetary reserves, would be
destroyed.
This last area of concern, that of the LDC's and their growing balance of payments pressures and problems, seems to me the most critical
area among those still calling for further action. The need is not necessarily for effort through the I M F ; indeed the greater need is for efforts outside
the I M F in order to avert a serious distortion of the I M F ' s own essential
purpose and image. This is not the place today to explore the LDC issues
in detail, but it is certainly also not the place to ignore or deprecate them.
We must be careful to avoid slipping into euphoria over the balance




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of payments and developmental needs of these countries following the "oil
shock" of 1973. There are many, and I have been among them, who probably
cried wolf too soon — at least so far as the potential for an actual breakdown
in the payments system was concerned. But we were not wrong in what we
foresaw as to the direction of pressures and the scale of the changes. For
it was apparent then, and is verifiable now, that grave structural consequences for many of the LDC ! s — an inability to pay for needed imports
and a shrinkage of already inadequate growth rates — would result from
the wholesale readjustment of the patterns of world trade and payments that
followed the abrupt increase of oil prices.
Where some of us went wrong was in fearing that an outright stalemate might occur as early as 1975 or 1976 for some of the LDC's. Actual
stalemate has been averted by a combination of unexpectedly heavy spending
on the part of the OPEC countries and unexpectedly bountiful lending of funds
both by those countries and by the banking institutions of many of the developed
countries. But the vast extension of credit, much of it for rather short maturities, has only delayed, if not compounded, the impact of the very real
structural realignments that must ultimately be faced by many of the LDC's.
This is not, I submit, a complex of problems to be met through r e soft to additional monetary reform, and certainly not through a creation of
SDRfs that wo uld debase their value. It is not, indeed, primarily an IMF type
of need. But it is a complex of problems which can threaten to impair the continued smooth functioning of an international monetary system that services
the payments requirements of an incredibly virile, versatile, and demanding
world economy. It calls at the least for prompt and ample support of the
World Bark,the International Development Association, the International
Finance Corporation, and related lending or financing institutions. I hope
that such support will have the urgent attention of tins Committee and the
Congress, as a counterpart of the very necessary legislation that is before
you today.

76-795 O - 76 - 6




78
Senator PROXMIRE. Thank you very much, M r . Roosa. The next witness is M r . Bennett.
I have the same reaction Senator Stevenson had. This is a most
distinguished panel.
But we do have a shortage of time so i f you could condense your
statement we would appreciate it.
STATEMENT OE JACK F. BENNETT, SENIOR VICE PRESIDENT AND
DIRECTOR, EXXON CORP.
M r . B E N N E T T . M r . Chairman, I have worked for 1 7 out of the past
21 years w i t h Exxon. Perhaps I should acknowledge to the committee
that my testimony this morning probably is also influenced by my
earlier academic and Government work on international financial matters and by the fact that I did work i n the Treasury from 1971 to
1975, first as Deputy Under Secretary and then as Under Secretary of
Monetary Affairs.
I would like to begin my testimony by recording my admiration for
the accomplishments of the Treasury officials i n the time since I left
the Treasury i n June 1975.
M y earlier assignments have given me an intense personal experience of the difficulties of international monetary negotiations.
Yet despite those difficulties, agreement has been reached on basic
reform i n the sense of agreement on fundamental changes i n the rules
i n the right directions.
For me, those negotiated changes are neither interim, partial, nor
minireform.
They are the changes roughly appropriate for todav. I don't know
of any other major changes appropriate for today. What changes we
may find appropriate i n the future. I don't know.
But I should perhaps mention that I doubt very much the prediction
of Eugene and Bob, that we w i l l find i t wise to return closer to a legal
fixed exchange rate relationship among major currencies.
I expect the reverse, and as a result, I expect in fact we shall have
more stability.
O f course, the results of these recent negotiations may not be ideal
from any individual point of view. But the question before your committee is not whether they are ideal but whether the Congress should
refuse to r a t i f y these agreements and send the administration back to
t r y to negotiate something different.
I am convinced that that would be a serious mistake. The willingness of other governments to enter into negotiations w i t h us on international economic matters would be seriously undermined, and no
better agreement would be negotiated.
I n the coming decade the United States and the world.are unlikely
to have as much employment, growth, and freedom from economic
disturbance as I think would be possible w i t h wiser domestic policies.
But we w i l l have more of those desirable results than would have
been the case i f these recent negotiations had failed or i f , alternatively,
they had tried to put us on the road to reestablishing a par exchange
system, or, worse yet, one tied to gold.
The Jamaica agreements, i f ratified, will, i n my judgment, provide
advantages i n three areas. They w i l l facilitate international trade and




79
investment, aid i n the fight against inflation, and assist i n the development of the economically less advanced areas of the world.
For those of us i n business I think one of the most important ways
i n which agreements are likely to facilitate trade is by removing the
tendency illustrated so often i n the past for governmental commitments to fixed exchange rates to lead to efforts to preserve those rates
by putting contraproductive controls on private international
transactions.
Also, now that the world's monetary officials can t u r n their attention
from fine disputes about the architecture of ornate castles i n the air, I
think they can concentrate on the real world before us. As a result,
through consultations, through publicity, and through decisions which
nations may receive from the I M F and which must extend assistance
through the I M F , these officials may now actively deter individual
governments f r o m burdening international commerce w i t h protectionist and autarchic controls and w i t h exchange market interventions
which prevent gradual economic adjustments and lead to disruptive
lurches i n exchange rates. The excuse, "We are just t r y i n g to maintain
a fixed rate," is no longer available to countries taking such actions.
Senator P R O X M I R E . I am sorry to interrupt. That is a r o l l call. I w i l l
run right over and come right back and be back i n less than 10 minutes.
I am sorry.
[Recess.]
Senator P R O X M I R E . I am sorry. I apologize, M r . Bennett. You were
right i n the middle of your statement.
M r . B E N N E T T . I w i l l t r y to shorten i t a bit.
I was talking about advantages of this new agreement i n terms of
facilitating trade.
I would like to skip over now to a second advantage that I expect
from the new agreements, assistance i n fighting inflation.
I say this recognizing that there are some who feel our only hope i n
stopping inflation is to impose on ourselves the discipline of an international exchange rate fixed i n terms of either a basket of currencies or
possibly i n terms of gold.
I sympathize w i t h the advocates of this course i n their appreciation
of the damage which inflation has done on our economies. B u t I conclude there is no gimmick which w i l l save us.
The only hope is better policies achieved through better public
understanding of the effects of inflation, and that wider understanding is more likely to develop w i t h floating exchange rates.
Par values are no longer credible deterrents to inflation.
Those who would urge governmental actions which would be inflationary would not be deterred by any contention that their proposals
would undermine the Government's commitment to a fixed exchange
rate.
They would know such commitments are not inviolable. A n d they
would be prepared i n any event to argue that their proposals were of
such priority as to justify additional governmental borrowing abroad
or controls on other activities affecting the exchange rates.
I n fact, as a result o f the appearance of stability sometimes achieved
by such controls, they sometimes encourage basically more profligate
policies.




80
For those reasons public consciousness of a government's inflationary
actions is likely to be retarded i n a par value system as compared to a
situation i n which inflationary actions are promptly reflected i n the
exchange rate.
Given the distaste of the electorate for a decline i n the international
value of a nation's currency, ready visibility of the effects of inflationary measures on currency vaiues is likely to be a much more
effective deterrent than the more circuitous consequences under a
par value system.
This conclusion seems inconsistent w i t h recent experience i n the
United Kingdom, for example.
The t h i r d area of advantage I see i n the new agreements is the
benefit which they are likely to bring to the development of the
economically less advanced areas.
I n making this remark, I am not t h i n k i n g primarily, as some m i g h t
expect, of the large amounts of loans which are being made to the less
developed countries out of the regular resources of the I M F and those
which w i l l be made out of the new trust fund.
I am thinking, rather, of two other effects. First, the new agreements for a more flexible monetary system w i l l reduce the pressures i n
the developed countries for protectionist measures which constrict
the export markets of the less developed countries.
Second, the demonstration that the developed countries i n large
part have come to realize the economic damage which can be done by
efforts to maintain fixed exchange rates should assist those i n the
developing countries who realize that such rates are likely to inflict
even greater economic and social damage on the less developed countries, where the foreign exchange control apparatuses accompanying
such fixed rate have often proved r i f e grounds for corruption.
I n summary, I see the advantages of the new agreements i n the
fact that they are not focused on a sympton, that is, a stable exchange
rate, but rather are concerned w i t h the underlying substance, that
is, the necessity of pursuing stable basic economic policies and avoidi n g disruptive, restrictive, and interventionist policies.
A l l o f which is not to say that there are not some dangers present,
for there are.
Under the new agreements there could still be attempts at excessive
management of exchange rates.
A f t e r all, the proposed new I M F Articles still contain anachronistic
language about promoting exchange stability, about a preferential
position for current transactions. A n d the report of the executive directors of the I M F on the new articles contain some disconcerting
words speaking of changes designed to assist the SDR to become the
principal reserve asset of the International Reserve System.
I t seems to me that there are always likely to be some central bankers urging firmer management of exchange rates w i t h the consequent
danger that inevitable change w i l l take the disruptive f o r m of discontinuous lurches.
Already this year we have seen how the efforts of the I t a l i a n authorities to stabilize the international value of the l i r a led to 'the
subsequent drop i n its value being so precipitous as to unsettle other
markets.




81
More recently we have seen how the efforts to hold the mark and
some lesser European currencies into a narrow band have generated
uncertainty and uneasiness i n the world currency markets.
There is also a danger that the world's monetary authorities w i l l
not f u l f i l l w i t h due diligence their responsibilities under the new system f o r surveillance of national policies.
One source of concern, which Bob also mentioned, is the fact that
the new articles do not literally establish administerial level oversight committee, but merely provide that such a committee could be
established by an 85 percent vote.
I hope the committee w i l l be set up promptly, for I think that highlevel surveillance w i l l be crucial to the proper functioning and evolution of the system.
I do not believe i t is possible to draft hard and fast rules to fit all
the situations which are likely to arise, but a committee meeting at a
political level should have the flexibility and prestige to make judgments which would influence national policy.
I n recent months i t probably would have been useful for such a
committee to address itself to the question which has been raised
whether this year the Japanese Government has been attempting improperly to hold down the value of the yen by adding substantia 1 ^ to
Japanese holdings of liquid foreign securities.
Undoubtedly during this period the I M F staff and executive board
have held their regular reviews of Japan, but I suspect that questions
of this type can sometimes best be handled only at a higher political
level i n a multilateral context.
Incidentally, I should say, Senator, that I have serious doubts about
the practical effects of the suggestion put forward by Senator Percy
this morning.
As he noted, his proposal would not guarantee the Congress access
to any particular piece of information held by the I M F . On the other
hand, I fear that i t might reduce substantially the access of the I M F
to information which other governments, for economic and political
reasons, would not as readily make available i f they feared such wide
'
circulation as Senator Percy suggests might result.
I might also note that the ministerial committee we were talking
about could probably assert itself i f a few countries tried to establish
some new de facto relationship between gold and the international
monetary system, though my judgment is that the risk is minimal.
I n the year and a half since the removal of U.S. restrictions on
private ownership of gold bullion, the instability of the price of gold
has been plain for all to see. That instability was evident well before
the I M F gold sales started a few months ago.
I realize, of course, that some i n this country and on this committee
have expressed concern that the existing agreement among the major
nations does not provide that the ban against t r y i n g to peg the price
of f?old w i l l extend beyond early 1978.
On the other hand, I notice that even the French are not buying
what they would be entitled to buy under their interpretation of that
agreement.
I would be prepared to see that special agreement ended r i g h t now
and I certainly wouldn't seek to prolong it.




82
I n my view, the sooner the special legal status for gold is ended, the
better, so that i t w i l l have a legal status no different from that of
other commodities.
That is the surest way to remove temptation from those who would
t r y to subject us again to the fragility of a gold-based system.
Finally I should mention that there is also a danger that the I M F
w i l l be allowed to degenerate to an automatic checkwriting machine
through failure i n practice to exercise its legal prerogative to determine which members are entitled to assistance and on what terms.
I t has been recognized that i t is important to distinguish between
the I M F short- and medium-term general financial support and the
long-term project assistance of the type provided by the W o r l d Bank
and other agencies.
I t is also generally recognized that loans from the I M F are no
longer for the purpose of preserving particular exchange rates.
But there has been reliance to a disturbing degree on narrow formulas rather than the overall judgment i n providing I M F loans.
Over the last few years quite a few billions were provided under a
semiautomatic basis under the semiautomatic oil import facility, and
new agreements provide for expansion of the compensatory financing
ability based on a very limited view of a nation's external trade.
I think the dangers I have listed do exist. But they are recognized
and thus can be avoided.
A n y institutional framework could be subverted. Institutional arrangements are nonetheless important i n determining results, and I
am convinced that the new arrangements which have been negotiated
represent a tremendous improvement over those of the past.
No longer does a structure center on an effort to prevent change i n
exchange rates.
As a result, the effort to deter disruptive governmental restrictions
and interventions can now continue without the serious handicap
under which i t has labored i n the past.
I think international cooperation i n financial affairs now has a promising future.
For that reason. M r . Chairman, I urge your committee to give
prompt support of the proposed legislation before you.
Thank you.
Senator PROXMIRE. Thank you, M r . Bennett.
M r . Salant?
STATEMENT OF WALTER S. SALANT, SENIOR FELLOW,
BROOKINGS INSTITUTION
M r . SALANT. M r . Chairman, I appreciate the privilege of being invited here as a witness.
The opinions that I w i l l express and that are i n my written statement, which I have submitted to the reporter, are personal opinions
and not necessarily those of my colleagues or the trustees or officers of
the Brookings Institution.
I might also note, i n view of Congressman Kees' statement that the
Brookings Institution had estimated the loss of emplovment due to
some of the monetary practices followed, that those estimates should
not be attributed to the Brookings Institution any more than any state-




83
ment should be. They are those of the particular staff member who
made them.
The interim committee of Governors of the Monetary Fund, meeti n g i n Jamaica, not only reached agreements about the substance of a
comprehensive amendment to the articles of agreement of the Fund
but reached other agreements that do not require changes i n the
articles.
Let me say that, although the agreements do not come close to solvi n g all the problems of the international monetary system, I think
Congress should authorize their acceptance.
M y reason for this recommendation is that the agreements are on
the whole, i f not i n all respects, a constructive step, and that they
evidently represent the best that could be obtained through agreement among nations w i t h diverse views on a number of issues.
Although the proposed amendments do not resolve some serious
problems, they do provide a basis for doing so i n the future. Further
experience w i t h the system, as i t operates, may be needed before these
first steps toward the improvement of international monetary arrangements can be followed by agreement about the matters remaini n g unresolved.
The subjects covered have conventionally been discussed under the
various specific headings concerning which agreement was reached,
such as exchange rate arrangements, agreements about gold, about
special drawing rights, increases in the quotas of members of the
Fund, liberalization of financing facilities, and so forth.
I think this organization of the subject is not very helpful i n
appraising the agreements, so I shall organize my remarks along
more functional lines, considering the main aspects of the agreement
i n relation to the characteristics of the system that appeared to need
improvement.
I n the dozen or more years during which the working of the international monetary system has been intensively analyzed by professional economists and policymakers, there evolved a general agreement
that the international monetary system had three major defects, which
were related to each other, but separable.
The first was called the adjustment problem and refers to the lack
of a satisfactory mechanism for maintaining equilibrium i n balances
of payments and for restoring i t when i t has been destroyed.
The second problem, called the liquidity problem, centered on the
absence of any rational method for controlling the amount of international monetary reserves, so that they should grow fast enough to
accommodate the growth i n the need for reserves, but not so fast as
to generate, or at least facilitate, inflation i n the world as a whole.
Actually, international liquidity, even i n the hands of international monetary authorities, consists not only of reserves but of facilities for borrowing, but the main defect i n the system was regarded
as centering on the reserves aspect of liquidity.
The t h i r d problem, dubbed the confidence problem, arose largely
because the system permitted the use of several different kinds of
reserve assets: Gold, national currencies, and reserve positions i n
the Fund, w i t h the addition i n 1969 of special drawing rights, which
were created i n part to remedy the liquidity problem. The confidence
problem, insofar as i t related to official reserves, referred to the dan-




84 .
ger that i f a country became fearful that the value of one component
of its reserve assets would depreciate i n relation to other components,
i t would t r y to alter the composition of its reserves, and that efforts
to do so would cause severe monetary disturbances.
F o r example, fear that a reserve currency was likely to depreciate
i n terms of gold would induce central banks to t r y to convert those
currency reserves into gold, and this would cause a loss of reserves
to the country i n whose currency the reserves were being held, forci n g the depreciation of that currency which was only feared before,
causing losses to other holders of that reserve currency, and perhaps
changing the total amount of reserves.
As long as countries were free to exchange one form of reserve for
another, this was a danger. There was a corresponding problem of the
confidence of private holders i n the value of a currency, f o r a loss of
confidence on their part could give rise to large reserve movements and
also b r i n g about the very developments which were feared.
The balance-of-payments adjustment problem arose largely because,
f o r deficit countries under a system of fixed exchange rates, i t implied
the pursuant of relatively deflationary policies (that is, deflationary
relative to those of other countries) and relatively expansive and
possibly inflationary policies on the part of surplus countries.
B u t deflationary policies adversely affect employment and output,
and deficit countries resist them.
Moreover, w i t h U.S. dollars and a few other national currencies
being held as reserves, the United States and other reserve-currency
countries could finance deficits i n their balances of payments without
paying out reserve assets. The United States, for example, could do so
by increasing its liabilities to foreign monetary authorities, so long as
those monetary authorities were w i l l i n g to hold the proceeds of their
surpluses i n dollar assets. I n effect, the reserve-currency country i n
deficit could manufacture the international money w i t h which to finance its own deficit, so that i t was under no pressure to correct a disequilibrium i n its balance of payments and the burden of adjustment
was placed on their countries.
I t w i l l be seen that these difficulties arose f r o m the effort to maintain fixed exchange rates, aggravated by the use of national currencies
and international reserves.
The proposed amendment of the articles says almost nothing explicitly about the adjustment process, but i t eliminates the legal obligation of member countries to maintain their currencies w i t h i n a very
limited range around their par values. This obligation has been generally ignored since March 1973, but the amendment, by releasing
countries f r o m the obligation, legitimizes the floating of exchange
rates.
Under the proposed amendment, orderly exchange arrangements
and a "stable system of exchange rates" are to be promoted by "fosteri n g orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions." That
provision would replace the old provision f o r obligatory official intervention i n the foreign exchange market.
The only reference to "adjustment" is i n an undertaking by member countries " t o avoid manipulating exchange rates or the interna5t i ^ a l monetary system i n order to prevent effective b^ance-ofcpay*




85
ments adjustment or to gain an u n f a i r competitive advantage over
other members."
T h a t means that member countries undertake both to avoid depreciation of their currencies to gain an u n f a i r competitive advantage
and to allow depreciation and appreciation of their currencies when
they are necessary f o r effective adjustment.
The provisions appear to do the m i n i m u m t h a t needed t o be done
about balance-of-payments adjustment.
I t is true, however, that they only express an objective. W h i l e countries undertake to avoid both the abuse of encouraging movements of
rates not necessary f o r adjustment and the abuse of necessary movements, reliance evidently has been put on surveillance by the I M F
of the practices of countries and on the adoption of "specific principles
f o r the guidance of members." ( A r t i c l e I V , section 3b.) There are no
new rules or sanctions to prevent abuses or violations. T h e i r absence
is the problem I see concerning adjustment. I t may be that enough
sanctions are already available, i f the F u n d is w i l l i n g to use them. I f
not, this may be a problem.
The more immediate problem, however, and the major next effort of
U.S. policy w i t h regard to adjustment matters is to develop and promote adoption of a good set of principles f o r surveillance by the Fund.
W i t h regard to international liquidity, i t was generally agreed i n the
course of the discussions of reform that better control of the amount
of official reserves was needed. A n d , i n view o f the problem of confidence i n reserve assets, better control over their composition was also
needed.
The influences determining both the amount and the composition of
reserves under the old system, were generally regarded as irrational,
being affected by gold production, by developments i n the private
demand f o r gold, by the state of the balance of payments of the
U n i t e d States and the other countries whose currencies were held as
reserves, and other factors affecting the relative demands f o r reserve
currencies.
T h i s was the main reason w h y i t was thought desirable to reduce
or at least control the roles of gold and of reserve currencies i n the
system and to make the S D R the principal reserve asset.
As t o the amount of reserves, i n the early stages of discussion concerning reform of the system, many people feared that reserves would
not grow fast enough to accommodate what they regarded as needed
increases i n them. More recently, many economists have come to fear
that international reserves are excessive i n amount and would encourage a continuation or acceleration of w o r l d inflation.
Under the old system an increase i n national currency reserves w i t h out a concomitant increase i n gold reserves would cause a loss of confidence i n currency reserves and a r u n on reserve currencies that would
break down the structure of exchange rates.
T o remedy this problem i t was thought necessary t o find a way of
consolidating reserves into one form, or at least to place some limits
on the proportions i n which the different forms of reserves were
held. A number of suggestions were made about consolidation through
so-called substitution accounts under which members would exchange
the forms of reserves that i t was desired to phase out f o r S D R - s a n d
other forms of reserves t h a t i t was thought desirable.to retain.




86
The amendment makes no provision to meet this problem. I t ' s only
provision bearing on the composition of reserve assets is that members
undertake to collaborate w i t h the F u n d and w i t h each other, i n order
to insure that the policies of the member w i t h respect to reserve assets
are "consistent w i t h the objectives of promoting better international
surveillance of international liquidity and making the special drawi n g right the principal reserve asset i n the international monetary
system."
The only other agreement on this subject was that the executive
directors "should continue their consideration of the subject of a substitution account," but that this work should not delay amendment of
the articles.
Professor F r i t z Machlup has called this l i p service to the idea.
The amendments also include a number of provisions for making
the holding of SDK's more attractive. I t appears clear, however, that
SDK's cannot be made of any great importance at the moment, whatever their future potenialities, since they are only about 4 percent of
total reserves—$10 billion out of a total of $235 billion of national
monetary reserves—and i f gold is written up to its present market
value, they would be little more than 3 percent.
W i t h regard to control of the total volume of international reserves,
the main relevant actions taken at Jamaica were those having to do
w i t h gold and surveillance by the F u n d of the exchange rate and
reserve policies of members and of the monetary system as a whole.
So f a r as gold is concerned, the amendments aboiish its official price.
This change frees national monetary authorities to write the book
value of their gold reserves up to the market value.
I f all monetary authorities write the book value of their gold up to
$105 per ounce, the recent approximate market value, this would raise
the value of gold reserves, as of the end of May 1976, the most recent
figure I have for all countries, f r o m about $41 billion to about $101
billion, or by $60 billion.
The agreement also eliminates all requirements to use gold i n transactions w i t h the Fund and prohibits the F u n d f r o m accepting gold,
unless a specific decision requiring an 85-percent majority vote is
made.
I n addition, one-sixth of the Fund's holding of gold is to be sold i n
the market. I f national monetary authorities buy this gold directly
or indirectly after the articles are amended, there would be a further
increase i n official gold holdings, although i t is a question whether
m o n e t a e authorities would then regard gold holdings as reserves.
Another one-sixth or 25 million ounces of the Fund's gold holdings
is to 'be returned to the member countries i n proportion to their quotas
i n the Fund.
I f the members write up the value of these 25 million ounces to $105
an ounce, this would add another $2.6 million to their gold reserves
and almost $1.6 billion to their total reserves ($2.6 billion addition
to their gold reserves, less approximately $1.0 billion because they pay
for i t at the old official price).
I f these possibilities occur, the changes i n official gold holdings
w i l l be substantial and i n the direction opposite to the one widely
recommended.
I n the first place, the distribution of the Fund's gold, disperses gold
:* holdings instead of consolidating them.




87
Second, the changes increase, instead of reducing, the role of gold i n
the monetary system, at least so far as the amount of i t is concerned.
T h i r d , they increase the total amount of monetary reserves.
Fourth, when gold could be sold on at the official price, i t was, i n
effect, frozen. B y enabling monetary authorities to engage i n gold
transactions at the market price, the gold agreement makes i t more
liquid, which may make effective monetary reserves, even at the same
stated values, larger than before.
The Group of Ten countries, which hold 73 percent of the world's
gold reserves, agreed among themselves not to peg the price, at least
i n the next 2 years, and they also agreed that the total stock of gold
i n their hands and the hands of the F u n d w i l l not be increased, at
least for 2 years.
The latter provision places a l i m i t on purchases, but i t does not rule
out purchases of gold to support the price when i t is weak.
The means of enforcing these restrictions, moreover, do not appear
to be very strong. These monetary authorities agreed to report their
official sales and purchases to the Fund, but only every 6 months, which
seems very infrequent.
I n short, the agreements appear to increase the role of gold i n the
system i n some ways as much as they decrease i t i n other ways, and
the ways i n which they increase that role may be more important.
I n particular, the arrangements permit substantial increases i n
monetary reserves at a time when there is still a general threat of
world inflation.
Reviewing the agreements about the amendments and the other
agreements concerning gold reserves as a whole, I have to agree w i t h
the critics of the agreement that the problems of control of liquidity
and the composition of reserve assets were not resolved, and remain at
least as great as they were before.
Hope for their solution may perhaps have been placed i n the principles that the F u n d is instructed to develop for surveillance of exchange rate arrangements, reserve assets, and the monetary system as a
whole, and the possibility that experience i n the next few years w i l l
permit agreement that cannot now be reached.
The question arises whether the failure to provide an effective means
of controlling the size and composition of reserves is so serious that
Congress should refuse to authorize U.S. acceptance of the agreements, despite the change from a r i g i d par value system to a system
of flexible rates or free choice.
Several experts have expressed the opinion that this aspect of monetary reform remains essential and at least one regards i t as urgent. The
main reason for this belief is that an unduly large volume o f reserves
or an unduly rapid rate of their growth is bound to generate further
world inflation.
M y own opinion is that even i f excessive creation of reserves is a,
serious problem, i t is not especially urgent. The dangers seem to me
to be of a 1 onger run ch aracter.
One reason f o r that opinion is that even i f the volume of world
reserves or, more generally, of international liquidity influences the
world price level, the relationship appears to be very loose and to
operate slowly. A n excessive level of world reserves exerts whatever
inflationary impact i t has by loosening the restraints of national
monetary and fiscal authorities on their own policies, removing their




88
inhibitions against running larger deficits or smaller surpluses i n their
balances of payments than they otherwise would, and transmitting the
resulting impulses to other countries.
I f the economic authorities of the major countries are seriously
determined to restrain inflation, they can do so; the growth o f their
holdings of international reserves can undermine that determination
only by an insidious and slow process.
Increases of a country's international monetary reserves increase its
money supply only when they are acquired by being purchased m the
market w i t h central bank money, and the big increase i n reserves that
w i l l result from the Jamaica agreement is not of that character. I t
w i l l be mainly a w r i t i n g up of book values. The fact is that the reserves
being acquired by intervention now are not very large.
W h i l e the reserves problem is one that requires sdution, i t is not so
urgent that we should reject the agreements that have been reached,
especially since there is no realistic reason for supposing that any
better agreements could be reached i n the near future.
The problem should continue to receive high-level attention, and we
must hope that the accumulation of further experience under the
existing arrangements and the passage of time w i l l permit i t to be
solved.
I therefore t h i n k that the committee should recommend to the Congress that i t authorize acceptance of the agreements.
I would add, however, that i t should also recommend that Congress
use whatever means are appropriate to press the executive branch to
give highest priority i n the field of international monetary matters to
developing principles for Fund surveillance of exchange-rate and
related policies and, second only to that, to control of the volume and
composition of reserve assets.
Senator PROXMIRE. Thank you very much.
[The complete statement follows:]




89
THE JAMAICA AGREEMENT

Statement by Walter S. Salant
Senior F e l l o w , Brookings I n s t i t u t i o n
before the
I n t e r n a t i o n a l Finance Subcommittee
of the
Senate Committee on Banking, Housing, and Urban A f f a i r s
August 27, 1976

The agreement reached by the I n t e r i m Committee of Governors of
the I n t e r n a t i o n a l Monetary Fund a t t h e i r meeting i n Jamaica on January
7 - 8 , 1976 consists of agreements about the substance of a comprehensive
amendment to the A r t i c l e s of Agreement of the Fund and other agreements
t h a t do not r e q u i r e changes i n the A r t i c l e s .

The United States cannot

accept the proposed changes i n the A r t i c l e s and some of the other
agreements without Congressional a u t h o r i z a t i o n , although t h a t i s not
t r u e of a l l the matters agreed upon a t Jamaica..

I understand t h a t the

primary issue before the Committee i s whether the Congress should
a u t h o r i z e acceptance of the Agreements f o r which a u t h o r i z a t i o n i s
r e q u i r e d , but t h a t , beyond t h a t , the Subcommittee i s i n t e r e s t e d i n the
broader issues w i t h which the Jamaica meeting was concerned.

Let me say

a t the outset t h a t although the Jamaica Agreement does not come close to
s o l v i n g a l l the problems of the i n t e r n a t i o n a l monetary system or even
a l l those on which experts had evolved s u b s t a n t i a l agreement i n the
discussions of recent y e a r s , I t h i n k the Congress should a u t h o r i z e t h e i r
acceptance.
My reasons f o r recommending t h a t Congress a u t h o r i z e acceptance
of the agreements a r e t h a t they a r e , on the whole, i f not i n a l l

respects,

The opinions expressed i n t h i s statement are my personal opinions and not
n e c e s s a r i l y those of the t r u s t e e s , o f f i c e r s , or other s t a f f members of the
Brookings I n s t i t u t i o n .




90
12

a c o n s t r u c t i v e s t e p , and t h a t they e v i d e n t l y represent t h e best t h a t
could be obtained through agreement among n a t i o n s w i t h d i v e r s e views
on a number of issues.

Although the proposed amendments do not r e s o l v e

some serious problems, they do provide a b a s i s f o r doing so i n the

future.

F u r t h e r experience w i t h the system as i t operates may be needed b e f o r e
these f i r s t steps toward t h e improvement of i n t e r n a t i o n a l monetary
arrangements can be followed by agreement about t h e m a t t e r s remaining
unresolved.
The subjects covered have c o n v e n t i o n a l l y been discussed under t h e
v a r i o u s s p e c i f i c headings concerning which agreement was reached, such
as exchange r a t e arrangements,agreements about g o l d , about s p e c i a l
drawing r i g h t s (SDRs), increases i n the quotas of members of the Fund,
l i b e r a l i z a t i o n of f i n a n c i n g f a c i l i t i e s ,

and so f o r t h .

I think

this

o r g a n i z a t i o n of the subject w i l l not be very h e l p f u l i n a p p r a i s i n g t h e
agreements, so I s h a l l organize my remarks along more f u n c t i o n a l
considering each aspect of the agreement i n r e l a t i o n t o t h e

lines,

characteristics

of t h e system t h a t appeared to need improvement.
I n the dozen or more years t h a t the working of the i n t e r n a t i o n a l
monetary system has been i n t e n s i v e l y analyzed by
p r o f e s s i o n a l economists and policymakers, t h e r e evolved a g e n e r a l
agreement t h a t the i n t e r n a t i o n a l monetary system had t h r e e major d e f e c t s ,
which were r e l a t e d t o each other but separable.

The f i r s t was c a l l e d

the adjustment problem, by which i s meant the l a c k of a s a t i s f a c t o r y
mechanism f o r m a i n t a i n i n g e q u i l i b r i u m i n balances of payments
r e s t o r i n g i t when i t has been destroyed.




and f o r

The second problem, c a l l e d t h e

91
12

l i q u i d i t y problem, centered on the absence of any r a t i o n a l method f o r
c o n t r o l l i n g the amount of i n t e r n a t i o n a l monetary reserves so t h a t
should grow a t a r a t e t h a t

i s not too slow to accommodate the growth

i n the need f o r r e s e r v e s , but also so t h a t
as to generate, or a t l e a s t f a c i l i t a t e ,
Actually, international l i q u i d i t y ,
monetary a u t h o r i t i e s ,

they

they do not grow so r a p i d l y

i n f l a t i o n i n the world as a whole.

even i n the hands of

international

consists not only of reserves but of

facilities

f o r borrowing, but the main defect i n the system was regarded as c e n t e r i n g
on the reserves aspect of

liquidity.

The t h i r d problem, dubbed the confidence problem, arose l a r g e l y
because the system p e r m i t t e d the use of s e v e r a l d i f f e r e n t kinds of
r e s e r v e assets: gold, n a t i o n a l c u r r e n c i e s , and reserve p o s i t i o n s i n the
Fund, w i t h the a d d i t i o n i n 1969 of s p e c i a l drawing r i g h t s , which were
created i n p a r t to remedy the l i q u i d i t y problem. The confidence problem,
i n s o f a r as i t r e l a t e d to o f f i c i a l r e s e r v e s , r e f e r r e d to the f a c t

that

i f a country holding i t s reserves i n one form became f e a r f u l t h a t the
v a l u e of t h a t component of i t s reserves would d e p r e c i a t e i n r e l a t i o n to
other components, i t would t r y to a l t e r the composition of i t s reserves
and t h a t e f f o r t s t o do so would give r i s e to monetary disturbances.

For

example, f e a r t h a t a reserve currency was l i k e l y to d e p r e c i a t e i n terms
of gold would induce c e n t r a l banks to t r y to convert those currency
reserves i n t o g o l d , and t h i s would cause a loss of reserves to the country
i n whose currency the reserves were being h e l d , f o r c i n g the d e p r e c i a t i o n
t h a t was only f e a r e d before and causing losses to the other holders of
the reserve currency.




As long as countries were f r e e to exchange one

92

form o f r e s e r v e f o r another t h i s was a danger.

There was a corresponding

problem of the confidence of p r i v a t e holders i n t h e v a l u e of the c u r r e n c y ,
f o r a loss of confidence on t h e i r p a r t could g i v e r i s e to l a r g e r e s e r v e
movements and b r i n g about t h e v e r y developments which were f e a r e d .

Balance-of-Payments Adjustment
The adjustment problem arose l a r g e l y because, f o r d e f i c i t

countries

under a system of f i x e d exchange r a t e s , i t i m p l i e d the p u r s u i t of
r e l a t i v e l y deflationary policies ( i . e . ,

d e f l a t i o n a r y r e l a t i v e t o those

of o t h e r c o u n t r i e s ) and r e l a t i v e l y expansive and p o s s i b l y
p o l i c i e s on the p a r t of surplus c o u n t r i e s .

inflationary

But d e f l a t i o n a r y

policies

adversely a f f e c t employment and output^and d e f i c i t c o u n t r i e s r e s i s t them.
Moreover, w i t h U.S. d o l l a r s and a few other n a t i o n a l currencies being h e l d
as r e s e r v e s , the United States (and other r e s e r v e - c u r r e n c y c o u n t r i e s )

could

f i n a n c e d e f i c i t s i n t h e i r balances of payments without paying out r e s e r v e a s s e t s ;
the U n i t e d S t a t e s , f o r example, could do so by i n c r e a s i n g i t s

liabilities

t o f o r e i g n monetary a u t h o r i t i e s , so long as these monetary a u t h o r i t i e s
were w i l l i n g to hold the proceeds of t h e i r surpluses i n d o l l a r

assets.

I n e f f e c t , the reserve-currency country i n d e f i c i t could manufacture t h e
i n t e r n a t i o n a l money w i t h which to f i n a n c e i t s own d e f i c i t ,

so t h a t

it

was under no pressure to c o r r e c t a d i s e q u i l i b r i u m i n i t s balance of
payments and the burden of adjustment was placed on other

countries.

I t w i l l be seen t h a t these d i f f i c u l t i e s arose from the e f f o r t
m a i n t a i n f i x e d exchange r a t e s , aggravated by the use of n a t i o n a l
and i n t e r n a t i o n a l

reserves.




to

currencies

93
12

The proposed amendment of the A r t i c l e s says nothing

explicitly

about t h e adjustment process,but i t d e l e t e s the p r o v i s i o n s of t h e
A r t i c l e s t h a t o b l i g a t e member countries to m a i n t a i n t h e i r
w i t h i n a v e r y l i m i t e d range around t h e i r par v a l u e s . T h i s

currencies
obligation

has been g e n e r a l l y ignored since March 1973, but the amendment, by
r e l e a s i n g c o u n t r i e s from the o b l i g a t i o n , l e g i t i m i z e s the f l o a t i n g of
exchange r a t e s .

Under the proposed amendment, o r d e r l y exchange

arrangements and a " s t a b l e system of exchange r a t e s " are to be promoted
by " f o s t e r i n g o r d e r l y underlying economic and f i n a n c i a l c o n d i t i o n s and
a monetary system t h a t does not tend t o produce e r r a t i c

disruptions,"

r a t h e r than by o b l i g a t o r y o f f i c i a l i n t e r v e n t i o n i n the f o r e i g n exchange
market.

The only r e f e r e n c e to "adjustment" i s i n an undertaking by member

c o u n t r i e s " t o avoid manipulating exchange r a t e s or the i n t e r n a t i o n a l
monetary system i n order to prevent e f f e c t i v e balance of payments adjustment
pr to gain an u n f a i r c o m p e t i t i v e advantage over other members."
t h a t member c o u n t r i e s undertake both to avoid d e p r e c i a t i o n o f

That means

their

currencies to gain an u n f a i r competitive advantage and to a l l o w d e p r e c i a t i o n
and a p p r e c i a t i o n of t h e i r currencies when they a r e necessary f o r

effective

adjustment.
The amendment i s v e r y permissive w i t h regard t o t h e choice of exchange
arrangements.

Members may peg t h e i r currencies to another currency,

float

alone, or f l o a t j o i n t l y w i t h o t h e r s , as they p l e a s e . They may d e c l a r e par
values i n terms of anything except g o l d .

The A r t i c l e s also would permit

the i n t r o d u c t i o n of a widespread system of " s t a b l e but a d j u s t a b l e " par
v a l u e s , but only by an 85 percent m a j o r i t y of the t o t a l v o t i n g power.

76-795 O - 76 - 7




94
12

Since t h e United States w i l l have more than 15 percent of the v o t i n g
power, i t w i l l be i n a p o s i t i o n to veto the i n t r o d u c t i o n of such a
system.

Moreover, the d e c i s i o n t o introduce such a system s h a l l be

made, according to the amended A r t i c l e s ,

i n the l i g h t of

(among other

t h i n g s ) "arrangements under which both members i n surplus and members
i n d e f i c i t i n t h e i r balances of payments take prompt, e f f e c t i v e , and
symmetrical a c t i o n to achieve adjustment."

( A r t i c l e I V , Section 5 . )

Even t h e n , any country can r e f u s e to e s t a b l i s h a par v a l u e , so long
as i t consults w i t h the Fund and ensures t h a t i t s exchange arrangements
" a r e consistent w i t h the purposes of t h e Fund and a r e adequate to
i t s o b l i g a t i o n s " under A r t i c l e I V , Section 1 .

fulfill

The par values t h a t would

be e s t a b l i s h e d may be defined i n terms of SDRs or any other common
denominator prescribed by the Fund, except t h a t i t may not be e s t a b l i s h e d
i n terms of gold or a currency.CSee Schedule C, Paragraph 1 . ) Even when
c o u n t r i e s e s t a b l i s h par v a l u e s , they may a l l o w the spot r a t e s f o r

their

c u r r e n c i e s to vary w i t h i n 4% percent on e i t h e r side of the par v a l u e ,
unless some other margin i s adopted by an 85 percent m a j o r i t y .
Paragraph 5 . )

(Schedule C,

This p r o v i s i o n permits a range of f l u c t u a t i o n between any

two such currencies of 18 p e r c e n t , a much wider range than was p e r m i t t e d
under the o r i g i n a l A r t i c l e s of Agreement.
These arrangements appear to do as much as needs — i n the
sense— t o be done about balance of payments adjustment.
however, t h a t they only express an o b j e c t i v e .

I t is

literal
true,

While t h e r e a r e d e c l a r a t i o n s

i n t h e amendment about avoiding abuses, both by encouraging and by r e f u s i n g t o
a l l o w r a t e s to move up or down, the emphasis i s on s u r v e i l l a n c e by t h e IMF




95
12

of t h e p r a c t i c e s of countries and on the adoption of " s p e c i f i c
f o r the guidance of members."

( A r t i c l e I V , Section 3 b . )

new r u l e s or sanctions to prevent abuses or v i o l a t i o n s .
problem I see concerning adjustment.

There a r e no
T h e i r absence i s the

I t may be t h a t enough sanctions

a,xe already a v a i l a b l e , i f the Fund i s w i l l i n g to use them.
t h i s may be a problem.

principles

If

not,

The more immediate problem, however, and the

major next e f f o r t of U.S. p o l i c y w i t h regard to adjustment matters
to develope and promote adoption of a good set of p r i n c i p l e s f o r

is

surveillance

by the Fund.

I n t e r n a t i o n a l Reserves
With regard to i n t e r n a t i o n a l l i q u i d i t y , i t was g e n e r a l l y agreed
i n the course of the discussions of reform t h a t b e t t e r c o n t r o l of the
Amount of o f f i c i a l reserveswas needed.

And, i n view of the problem of

confidence i n r e s e r v e assets, b e t t e r c o n t r o l over t h e i r composition was
also needed.

The i n f l u e n c e s determining both the amount and the composition

of reserves under the o l d system were g e n e r a l l y regarded as i r r a t i o n a l ,
being a f f e c t e d by gold production, by developments i n the p r i v a t e demand
f o r gold, and by the s t a t e of the balance of payments of the United States
and the other c o u n t r i e s whose currencies were held as r e s e r v e s .

This was

the main reason why i t was thought d e s i r a b l e to rcduce or a t l e a s t

control

the r o l e s of gold and of reserve currencies i n the system and to make the
SDR the p r i n c i p a l reserve a s s e t .
As to the amount of r e s e r v e s , i n the e a r l y stages of discussion
concerning reform of the system

many people feared t h a t reserves would

not grow f a s t enough to accommodate what they regarded as needed increases




96
12

i n them.

More r e c e n t l y , many economists have come to f e a r t h a t

international

reserves a r e excessive i n amount and would encourage a c o n t i n u a t i o n or
a c c e l e r a t i o n of world i n f l a t i o n .
Under the o l d system i t was a l s o f e a r e d t h a t an i n c r e a s e i n n a t i o n a l
currency reserves without a concomitant increase i n gold reserves would
cause a l o s s of confidence i n currency reserves and a run on r e s e r v e
currencies t h a t would break down the s t r u c t u r e of exchange r a t e s .
remedy t h i s problem* i t was thought necessary to f i n d a way of

To

consolidating

reserves i n t o one f orms ^or a t l e a s t to place some l i m i t s on the p r o p o r t i o n s
i n which the d i f f e r e n t forms of reserves were h e l d .

A number of

suggestions

were made about c o n s o l i d a t i o n through s o - c a l l e d " s u b s t i t u t i o n accounts"
under which members'*wd!ild exchange the forms of reserves t h a t i t was
d e s i r e d t o phase out f o r SDRs and other forms of reserves t h a t i t was
thought d e s i r a b l e to r e t a i n .
a s u b s t i t u t i o n account.

The amendment makes no p r o v i s i o n f o r such

The only p r o v i s i o n t h a t I have found i n the

amendment b e a r i n g on the composition of reserve assets i s
Article V I I I ,

that,under

Section 7, each member "undertakes to c o l l a b o r a t e w i t h the

Fund and w i t h other members i n order t o ensure t h a t the p o l i c i e s

o f the

member w i t h respect to reserve assets be consistent w i t h thfe o b j e c t i v e s
of promoting b e t t e r i n t e r n a t i o n a l s u r v e i l l a n c e of i n t e r n a t i o n a l

liquidity

and making the s p e c i a l drawing r i g h t s of the p r i n c i p l e r e s e r v e asset
the i n t e r n a t i o n a l ^ m o n e t a r y system."

in

Apart from t h i s , t h e only t h i n g

agreed to a t Jamaica i s t h a t t h e Executive D i r e c t o r s "should continue t h e i r
c o n s i d e r a t i o n of the subject of a s u b s t i t u t i o n a c c o u n t , " but t h a t
work should not delay amendment of the A r t i c l e s .




this

97
12

Professor F r i t z Machlup has c a l l e d t h i s " l i p s e r v i c e " t o the i d e a ,
and h i s c h a r a c t e r i z a t i o n seems to me j u s t i f i e d .

There may

not be a

problem of s h i f t s between gold, SDRs, and the d o l l a r , but t h e r e w i l l

still

be danger of s h i f t s between currencies and a t h r e a t to the s t a b i l i t y of
exchange r a t e s t h a t i s not j u s t i f i e d by needed adjustments i n balances of
payments.
The amendments also include p r o v i s i o n f o r making the holding of
SDRs more a t t r a c t i v e .

They d e l e t e the e x i s t i n g l i m i t a t i o n on the

r a t e of i n t e r e s t payable on holdings of SDRs, making the r a t e subject
to determination by a 70 percent m a j o r i t y of the Fund's v o t i n g power.
They also widen the r o l e of SDRs by making i t e a s i e r f o r c e n t r a l banks
to use them to e n t e r i n t o SDR t r a n s a c t i o n s w i t h each other v.ithout
authorization

by

the

Fund and by dropping the present

special

requirement

of A r t i c l e XXV, Section 3 ( a ) t h a t a country demonstrate a need to exchange
reserve assets i n order to meet s p e c i f i c f i n a n c i n g requirements.

Other

changes widen the c a t e g o r i e s of possible holders of SDRs t o include
o f f i c i a l e n t i t i e s other than countries p a r t i c i p a t i n g i n the SDR arrangements
and permit t r a n s a c t i o n s among holders who are not p a r t i c i p a n t s .

These

and other p r o v i s i o n s f o r making SDRs a more a t t r a c t i v e r e s e r v e asset

(which

are explained on pages 68-72 of the r e p o r t by the Executive D i r e c t o r s of
the IMF to the Board of Governors, dated March 1976) are h i g h l y
and need not be considered here.

technical

I t appears c l e a r , however, t h a t they cannot

be of any g r e a t importance a t the moment, whatever r h e i r f u t u r e

potentialities,

since SDRs were only about 4 percent of t o t a l reserves at the end of May 1976
($10 b i l l i o n out of a t o t a l of $235 b i l l i o n of n a t i o n a l monetary reserves)




98
12

and i f gold i s w r i t t e n up t o i t s present market v a l u e they would be
l i t t l e more than 3 p e r c e n t .
W i t h regard t o c o n t r o l of the t o t a l volume of i n t e r n a t i o n a l

reserves,

t h e main r e l e v a n t actions taken a t Jamaica a r e those having to do w i t h
gold and s u r v e i l l a n c e by the Fund of the exchange r a t e and r e s e r v e p o l i c i e s
of members and o f the monetary system as a whole.

( S u r v e i l l a n c e of exchange

r a t e s and p o l i c i e s and reserve p r a c t i c e s a r e r e f e r r e d to i n A r t i c l e
Section 3

and i n A r t i c l e V I I I ,

Section 7 ) .

So f a r as gold i s concerned, the amendments a b o l i s h i t s
price.

IV,

official

This change f r e e s n a t i o n a l monetary a u t h o r i t i e s to w r i t e t h e

book v a l u e of t h e i r gold reserves up to the market v a l u e .

I f a l l monetary

a u t h o r i t i e s w r i t e the book v a l u e o f t h e i r gold up to $115 per ounce, t h e
r e c e n t approximate market v a l u e , t h i s would r a i s e the v a l u e of gold
reserves (as of t h e end of May 1976, the most recent f i g u r e I have
f o r a l l c o u n t r i e s ) from about $41 b i l l i o n t o about $111 b i l l i o n , or by
$70 b i l l i o n .

The agreement a l s o e l i m i n a t e s a l l requirements to use gold

i n t r a n s a c t i o n s w i t h the Fund and p r o h i b i t s the Fund from accepting gold
unless a s p e c i f i c decision r e q u i r i n g an 85 percent m a j o r i t y v o t e i s made.
I n a d d i t i o n , o n e - s i x t h of the Fund T s 1 5 0 - m i l l i o n - o u n c e h o l d i n g of gold
a r e to be sold iri t h e market.

I f n a t i o n a l monetary a u t h o r i t i e s buy t h i s

gold d i r e c t l y or i n d i r e c t l y a f t e r the A r t i c l e s a r e amended, t h e r e would
be f u r t h e r increase i n o f f i c i a l gold h o l d i n g s , although i t i s -a m a t t e r of
o p i n i o n whether these would then be regarded as " r e s e r v e s . "

If

gold from the Fund such purchases reduce t h e i r other r e s e r v e s .




they buy

99
n

Another o n e - s i x t h or 25 m i l l i o n ounces of the Fund's gold holdings
is

to be returned to the member c o u n t r i e s i n p r o p o r t i o n to t h e i r quotas

i n the Fund.

If

the members w r i t e up the v a l u e of these 25 m i l l i o n ounces

from $42.22 an ounce to $115 an ounce, t h i s would add another $2.9 b i l l i o n
t o t h e i r gold reserves and $ 1 . 8 b i l l i o n to t h e i r t o t a l reserves ( $ 2 . 9 b i l l i o n
a d d i t i o n to t h e i r gold reserves l e s s $ 1 . 1 b i l l i o n which they pay f o r a t the
official

price).

I f both of these l a s t two p o s s i b i l i t i e s *occur, t h a t i s , n a t i o n a l monetary
a u t h o r i t i e s buy the gold t h a t the Fund s e l l s and also mark up the amounts
t h a t a r e r e s t i t u t e d , the changes i n gold reserves &'re i n t h e d i r e c t i o n opposite
to the one w i d e l y recommended.

I n the f i r s t p l a c e , these changes disperse

gold holdings i n s t e a d of c o n s o l i d a t i n g them.

Second, they increase instead

of reducing t h e r o l e of gold i n the monetary system.
t h e t o t a l amount of monetary reserves.

T h i r d , they increase

Fourth, when gold could be sold

only a t the o f f i c i a l p r i c e i t was i n e f f e c t f r o z e n .

By enabling monetary

a u t h o r i t i e s to engage i n gold t r a n s a c t i o n s a t the m a r k e t . p r i c e , the gold
agreement makes i t l i q u i d , thereby making e f f e c t i v e monetary r e s e r v e ^ ,
even a t t h e same s t a t e d v a l u e s , l a r g e r than b e f o r e .
The Group of Ten countries, which hold 73 percent of the w o r l d ' s gold
r e s e r v e s , agreed among themselves not to peg the p r i c e of g o l d , a t

least

i n the. next two y e a r s , and they also agreed t h a t they would not use t h e i r
freedom to buy i t i n such a way as to increase the t o t a l stock of gold i n
t h e i r hands and the hands of the Fund.

The l a t t e r p r o v i s i o n places a

l i m i t on purchases, but i t does not r u l e out purchases of gold to support
t h e p r i c e when i t i s weak, since i t leaves the monetary a u t h o r i t i e s




free

100
12

t o engage i n gold t r a n s a c t i o n s a t m a r k e t - r e l a t e d p r i c e s subject to these
restrictions.

The means of enforcing these r e s t r i c t i o n s , moreover, do

not appear t o be v e r y strong.

The monetary a u t h o r i t i e s a r e not even

r e q u i r e d to r e p o r t o f f i c i a l s a l e s and purchases more f r e q u e n t l y than
every s i x months.
I n s h o r t , the agreements i n Jamaica appear t o increase t h e r o l e of
gold i n t h e system i t i some ways as much as they decrease i t i i j o t h e r ways,
and the ways i n which they increase t h a t r o l e may be more important*
I n p a r t i c u l a r , the arrangements permit s u b s t a n t i a l increases i n monetary
reserves a t a time when t h e r e i s s t i l l a general t h r e a t of world

inflation.

Reviewing the agreements about the amendments and t h e other agreements
concerning gold reserves i n g e n e r a l , I have t o agree w i t h the f j r - i t i c s
of t h e agreement t h a t the problems of c o n t r o l of l i q u i d i t y and t h e
composition of reserve assets were not r e s o l v e d , and remain a t l e a s t as
g r e a t as they were b e f o r e . Hope f o r t h e i r s o l u t i o n may perhaps have been
placed i n the p r i n c i p l e s t h a t t h e Fund i s i n s t r u c t e d to develop f o r
s u r v e i l l a n c e of exchange r a t e arrangements, r e s e r v e assets, and t h e
monetary system as a whole a n d . t h e p o s s i b i l i t y t h a t experience i n the next
few years w i l l permit agreement t h a t cannot now be reached.
The question a r i s e s whether the f a i l u r e t o provide an e f f e c t i v e
system f o r c o n t r o l l i n g reserves i s so serious t h a t Congress should
r e f u s e to a u t h o r i z e U.S. acceptance of t h e agreements, d e s p i t e the
d e s i r a b l e change from a r e l a t i v e l y r i g i d par v a l u e system t o a system of
f l e x i b l e r a t e s or f r e e choice o r , i f you p r e f e r , to a non-system.




It

is

101
12

g e n e r a l l y agreed t h a t i n a system i n which exchange r a t e s f l o a t

freely

— t h a t i s i n which t h e r e i s no o f f i c i a l i n t e r v e n t i o n — reserves a r e of
l i t t l e concern; a l l d i s e q u i l i b r i a between the demand f o r a currency and
the supply of i t a r e r e f l e c t e d i n the p r i c e , so t h a t reserves a r e not
needed.

Since i t i s c l e a r , however, t h a t we do not and s h a l l not have

t h a t k i n d of system but r a t h e r one i n which exchange r a t e s are managed,
the question i s how important reform of the reserve system i s under such
an arrangement.
Several experts have expressed the opinion t h a t t h i s aspect of
monetary reform remains e s s e n t i a l and a t l e a s t one regards i t as u r g e n t .
The main reason f o r t h i s b e l i e f i s t h a t an unduly l a r g e volume of reserves
or an unduly r a p i d r a t e of t h e i r growth i s bound to generate f u r t h e r
world i n f l a t i o n .

Governor Henry W a l l i c h of the Federal Reserve System,

w h i l e recognizing t h a t the r e l a t i o n s between i n t e r n a t i o n a l l i q u i d i t y and
payments p o s i t i o n s i s very loose, b e l i e v e s t h a t reserves m a t t e r .

He

notes t h a t a c q u i s i t i o n of reserves through i n t e r v e n t i o n i n the f o r e i g n
exchange markets expands bank reserves and the domestic money supply.

He

also argues t h a t a c q u i s i t i o n of l i q u i d i t y , whether i n the form of reserves
or c r e d i t f a c i l i t i e s ,

increases the p r o p o r t i o n of n a t i o n a l income t h a t i s

imported, although he recognizcs t h a t t h i s i s not t r u e of a l l c o u n t r i e s , and that:
reserves also i n f l u e n c e the p o l i c i e s of some countries w i t h respect to
exchange r a t e s , so t h a t e f f e c t i v e c o n t r o l of i n t e r n a t i o n a l l i q u i d i t y and
of gross r e s e r v e s , which a r e an important p a r t of such r e s e r v e s , does
i n f l u e n c e economic p o l i c y and behavior.

He regards t h i s conclusion as

no l e s s v a l i d under f l o a t i n g than under f i x e d exchange r a t e s and concludes




102
12

t h a t I n t e r n a t i o n a l l i q u i d i t y i n general and reserves i n p a r t i c u l a r do
matter.

Mr. Tom de V r i e s , an A l t e r n a t e Executive D i r e c t o r of t h e Fund,

i n an a r t i c l e i n t h e A p r i l 1976 issue of Foreign A f f a i r s e n t i t l e d "Jamaica
or the Non-Reform of the I n t e r n a t i o n a l Monetary System", says t h a t
system permits a country to o b t a i n the amount of reserves i t

the

prefers

by borrowing and manipulating i t s exchange r a t e and t h a t t h i s system,

in

which t o t a l r e s e r v e c r e a t i o n i s determined by demand, i s bound t o r e i n f o r c e
i n f l a t i o n a r y tendencies i n t h e world.

For t h i s reason he regards the

problem of c o n t r o l l i n g i n t e r n a t i o n a l l i q u i d i t y as an urgent unsolved
question.

Professor Robert T r i f f i n of Y a l e U n i v e r s i t y , who diagnosed

some o f the problems inherent i n the B r e t t o n Woods system as long ago as
1960, a l s o c r i t i c i z e s the agreements on t h i s score, as w e l l as on o t h e r s .
My own opinion i s t h a t even i f

excessive c r e a t i o n of reserves i s

a serious problem, I doubt t h a t i t i s e s p e c i a l l y u r g e n t .
seem to me to be of a longer run c h a r a c t e r .

The dangers

One reason f o r

that

o p i n i o n i s t h a t even i f the volume of world reserves o r , more g e n e r a l l y ,
of i n t e r n a t i o n a l l i q u i d i t y i n f l u e n c e s the world p r i c e l e v e l ,

the r e l a t i o n s h i p

appears t o be v e r y loose and to operate s l o w l y , as Covernor W a l l i c h
recognized i n the course of h i s own argument.

An excessive l e v e l of world

reserves e x e r t s whatever i n f l a t i o n a r y impact i t has by loosening the
r e s t r a i n t s of n a t i o n a l monetary and f i s c a l a u t h o r i t i e s on t h e i r own p o l i c i e s ,
encouraging them to run l a r g e r d e f i c i t s or smaller surpluses i n

their

balances of payments than they otherwise would and t r a n s m i t t i n g the r e s u l t i n g
impulses to o t h e r c o u n t r i e s .

If

the economic a u t h o r i t i e s of the major

c o u n t r i e s are s e r i o u s l y determined to r e s t r a i n i n f l a t i o n ,




the growth of

103
12

t h e i r holdings of i n t e r n a t i o n a l reserves can undermine t h a t
only by an i n s i d i o u s and slow process.

determination

Increases of a c o u n t r y ' s

international

monetary reserves increase i t s money supply only when they a r e acquired by
being purchased i n the market w i t h c e n t r a l bank money, and the b i g increase
i n reserves t h a t w i l l r e s u l t from the Jamaica agreement — t h e c a p i t a l gain
from the increase i n the book value o f gold r e s e r v e s — i s not of t h a t
character.

The f a c t i s t h a t the reserves being acquired by i n t e r v e n t i o n now

a r e not very l a r g e . I t h e r e f o r e regard the problem as one t h a t

requires

s o l u t i o n , but as one not so urgent t h a t we should r e j e c t the agreements
t h a t have been reached, e s p e c i a l l y since t h e r e i s no r e a l i s t i c reason f o r
supposing t h a t any b e t t e r agreements could be reached i n the near

future.

The problem should continue to r e c e i v c h i g h - l e v e l a t t e n t i o n , and we must
hope t h a t the accumulation of f u r t h e r experience under the e x i s t i n g
arrangements and the passage of time v r i l l permit i t t o be solved.

That

view may be regarded as d e f e a t i s t but the acceptance of the agreements t h a t
i t i m p l i e s i s more r e a l i s t i c and l e s s d e f e a t i s t than would be a r e j e c t i o n
of the proposed amendments to the A r t i c l e s of Agreement.

I

therefore

t h i n k t h a t the Committee should recommend to the Congress t h a t i t
acceptance of t h e amendments.

authorize

I would add, however, t h a t i t should use

whatever means a r e a p p r o p r i a t e to press the Executive Branch to g i v e
highest p r i o r i t y i n the f i e l d of i n t e r n a t i o n a l monetary m a t t e r s to developing
p r i n c i p l e s f o r Fund s u r v e i l l a n c e of exchange r a t e and r e l a t e d p o l i c i e s and
second only to t h a t , to c o n t r o l of the volume and composition of reserve a s s e t s .




104
Senator PROXMIRE. Professor Aliber, again I apologize for the late
hour. You gentlemen are very, very patient.
Professor ALIBER. Thank you, Mr. Chairman.
I t is a privilege to be here, especially among such distinguished
colleagues.
I would ask that my statement be inserted i n the record.
Senator PROXMIRE. Yes. I t w i l l be.
STATEMENT OF ROBERT Z. ALIBER, GRADUATE SCHOOL OF
BUSINESS ADMINISTRATION, UNIVERSITY OF CHICAGO
Professor ALIBER. I w i l l speak briefly to three or four of the major
highlights i n my statement.
There is, I think, a great deal that I would agree with that my colleagues on the panel have said today and a great deal that I disagree
with. I support the legislation. I think I should indicate that I think
the legislation is unimportant in terms of its economics. We are largely
at the stage of monetary reform where the end is the means. This is
part of an ongoing process. We are at a stage i n which the future shape
of the system is not yet definable and the rules for that system are still
premature.
I f we look at monetary agreements they are essentially two types.
One type is prospective and really affects the future behavior of countries. The Bretton Woods Agreement was of that model.
Most other agreements are retrospective. What one essentially does
is legitimatize the ongoing behavior of countries and the agreements
have minimal impacts on their behavior. This agreement clearly is i n
the second set. The world is not going to be significantly different i f
this legislation is passed, i f we have the Jamaica agreements. W h a t
we are essentially dealing w i t h is the trade-off between rules and of
market forces.
I n the 1960's we saw great pressures on that fight, the rules became
increasingly inconsistent w i t h the market forces. The market forces
were observable i n the gold market and the gold parity which was
deemed such a large central part of the system finally was changed.
The system pegged exchange rates, which were part of the rules, gave
way under the pressure of market forces.
As we look to the future, one of the problems we have to see is what
is going to be the nature of market forces and what is going to be
happening i n the exchange market.
Two points, I think, are important here. Both point to the responsibilities that f a l l on the United States. I f the United States succeeds
i n adopting stable monetary policies, then we have laid the necessary
conditions for monetary stability around the world and we w i l l observe
almost automatically that the fluctuations i n exchange rates Become
smaller and smaller and that we w i l l have laid the basis for a system
of stable parities.
Whether there are then advantages i n legitimatizing a par value
system can be determined at that time, but the advantages clearly are
going to be small, rather than large. I f we do not succeed i n getting
price stability, then the efforts to use rules to get to stable exchange
rates are going to prove unsuccessful and efforts at monetary reform
w i l l accomplish very little. So, we have the necessary condition i n successful'domestic p o l i c i ^ , the Mfficient condition ts that tlie United




105
States then take leadership i n getting rules to legitimatize the exchange rate, practices, and behavior that we would then observe. So,
at this time, i t is, I think, essentially premature to t r y to do anything
about monetary reform.
We should take those measures which are necessary to stabilize the
system. I n the interim future to achieve and lend some stability to the
gold market. Gold is an extremely important monetary asset. We have,
i n the United States, "kidded" ourselves about the role of gold i n the
system. Gold was dethroned f r o m the system i n 1913. It's really been a
peripheral asset ever since. We gave i t undue importance i n the 1960's
because we became fascinated w i t h the fixed price relationship and
because we became obsessed w i t h the political costs of changing the
gold price. Gold is either the most important reserve asset i n the system or is the second most important reserve asset i n the system.
Cost is extremely important to many countries. Many of these countries are friends and allies. No U.S. interest is served by the large instability that we have had i n the gold market. No great costs would
be imposed on the United States and participating arrangements i n
l i m i t i n g gold price movements.
Most of the instability i n the gold price movements that we have
seen i n the last 3 or 4 years have come about because of the actions
of governments. The large gold price increases that began i n 1972,
continued through 1973, were a reflection of the distrust i n money, the
feeling that rates of inflation were going to continue to accelerate.
The downturn i n gold prices since 1974 has relatively little
to do w i t h U.S. legislation or the U.S. gold sales. The downturn came
about because expectations of inflation were changing very sharply.
The sharp downturns we have seen i n the gold price i n recent months
must be due to the I M F gold sales.
I thank you, M r . Chairman.
[Complete statement follows:]




106

STATEMENT OF

ROBERT Z. ALIBER

PROFESSOR OF INTERNATIONAL ECONOMICS AND FINANCE,




GRADUATE SCHOOL OF BUSINESS,

UNIVERSITY OF CHICAGO

AUGUST 2 7 , 1976

107
Before t h e I n t e r n a t i o n a l Finance Subcommittee o f t h e Committee on Banking,
Housing, and Urban A f f a i r s on S.

» a b i l l t o amend t h e B r e t t o n Woods

Agreements A c t , August 2 7 , 1976

I t i s an honor t o be i n v i t e d t o t e s t i f y on t h e Jamaica Agreement,
T h i s agreement should be r a t i f i e d by t h e Congress,

The importance o f

t h e agreement i s t h a t i t l e g i t i m a t i z e s t h e e x i s t i n g exchange market a r r a n g e ments, e s p e c i a l l y t h e widespread move t o f l o a t i n g exchange r a t e s by t h e
industrial countries.

The c e s s a t i o n o f c e n t r a l bank i n t e r v e n t i o n i n t h e

f o r e i g n exchange market a t e s t a b l i s h e d p a r i t i e s contravened t h e l e g a l r u l e s
o f t h e B r e t t o n Woods system; t h e U n i t e d S t a t e s and o t h e r c o u n t r i e s have
ignored t h e i r t r e a t y commitments.
The evidence o f t h e l a s t t h r e e y e a r s suggests t h a t f l o a t i n g r a t e s

vill

work even w i t h o u t a t r e a t y ; t h e Jamaica Agreement adds l i t t l e i f anything t o
t h e economics o f t h e system.

The agreement enhances t h e importance o f

r u l e s i n i n t e r n a t i o n a l monetary a r r a n g e m e n t s - - o f a c o o p e r a t i v e approach t o
common problems, and an agreed procedure f o r r e c o n c i l i n g

conflicts.

I t would be m i s l e a d i n g t o suggest t h a t t h e m e a n i n g f u l steps have been
t a k e n toward what i s u s u a l l y meant by monetary r e f o r m .
l a r g e l y procedural.
practices.

What has happened i s

The r u l e s w i l l have minimal impact on exchange market

But t o expect s i g n i f i c a n t progress on monetary r e f o r m w h i l e

i n f l a t i o n r a t e s range between 5 and 10 p e r c e n t i n t h e major

industrial

c o u n t r i e s i n v o l v e s a misunderstanding o f what monetary r e f o r m i s a l l

about.

The amendment t o t h e B r e t t o n Woods Agreement p r o v i d e s an o p p o r t u n i t y t o
r e v i e w t h e U . S . p o s i t i o n s on i n t e r n a t i o n a l monetary p o l i c y over t h e l a s t
f i f t e e n y e a r s , and t o contemplate t h e most a p p r o p r i a t e p o s t u r e f o r

future

changes i n monetary arrangements—where t h e U n i t e d S t a t e s wishes t o go, and
how i t might b e s t g e t




there.

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-2-

I n t e r n a t i o n a l monetary r e f o r m has been on t h e agenda f o r more t h a n
f i f t e e n y e a r s s i n c e Professor T r i f f i n o f Y a l e p u b l i s h e d t h e Gold and t h e
Dollar Crises.

Monetary r e f o r m i n v o l v e s changes i n commitments t h a t

countries

make t o each o t h e r , e i t h e r b i l a t e r a l l y , o r more r e c e n t l y , on a m u l t i - l a t e r a l
basis.

They may commit themselves t o l e n d t o o t h e r s , t o i n t e r v e n e ( o r n o t t o

i n t e r v e n e ) i n t h e exchange market a t p a r t i c u l a r r a t e s , t o buy ( o r s e l l )

gold,

a t f i x e d p r i c e s , . t o r a i s e ( o r l o w e r ) i n t e r e s t r a t e s , t o m a i n t a i n t h e growth
o f t h e i r monetary v a r i a b l e s w i t h i n c e r t a i n l i m i t s , and t o a v o i d t h e use o f
exchange c o n t r o l s .

There have been numerous changes i n

institutional

arrangements, such as t h e General Arrangements t o Borrow, t h e r e c i p r o c a l
c r e d i t arrangements among c e n t r a l b a n k s , t h e S p e c i a l Drawing R i g h t s a r r a n g e ments, i n c r e a s e s i n IMF q u o t a s , t h e g o l d p o o l , t h e t w o - t i e r g o l d system, and
t h e Smithsonian Agreement.

Those agreements i n v o l v i n g t r a n s f e r s , o f

credit

g e n e r a l l y have been t r e a t y - b a s e d ( i n p a r t because t h e domestic funds i n v o l v e d
i n t h e e x t e n s i o n o f c r e d i t a r e t r e a t e d as a p u b l i c e x p e n d i t u r e i n t h e
. n a t i o n a l f i n a n c i a l a c c o u n t s ) ; those concerned w i t h g o l d and exchange r a t e s
i n v o l v e e x e c u t i v e agreements, a t l e a s t

initially.

Reform agreements f a l l i n t o two groups—some a r e p r o s p e c t i v e , and
attempt t o i n f l u e n c e "the f u t u r e i n t e r n a t i o n a l monetary b e h a v i o r o f
pating countries.

partici-

One model i s t h a t o f t h e B r e t t o n Woods

Agreement, which promulgated a s e t o f r \ i l e s f o r t h e exchange market
p r a c t i c e s o f i n d i v i d u a l c o u n t r i e s which d i f f e r e d -sharply from t h e i r
current practices.

then-

The Keynes P l a n f o r an i n t e r n a t i o n a l c l e a r i n g u n i o n ,

and numerous p l a n s f o r w o r l d c e n t r a l banks i n t h e 1960*3 a r e i n t h i s group.
Some agreements a r e r e t r o s p e c t i v e i n t h a t t h e y t e n d t o c o d i f y t h e c u r r e n t
mode o f monetary b e h a v i o r .




Thus t h e Jamaica Agreement c o d i f i e s t h e c u r r e n t .

109
-3-

p a t t e r n o f exchange market arrangements; c o u n t r i e s can p e r m i t t h e i r
r e n c i e s t o f l o a t or t h e y can peg t h e i r c u r r e n c i e s .

cur-

Accordingly accepting

t h e commitments which a r e c o n t a i n e d i n t h e r e f o r m package r e q u i r e s no
s i g n i f i c a n t change i n t h e exchange market b e h a v i o r or p r a c t i c e s o f any Fund
member.
The p r o s p e c t i v e approach t o monetary r e f o r m i m p l i e s t h a t market f o r c e s
or p o l i c i e s should be c o n s t r a i n e d t o conform t o t h e r u l e s , w h i l e t h e r e t r o ~
s p e c t i v e view i m p l i e s t h a t t h e r u l e s would not be i n c o n s i s t e n t w i t h t h e
practices or behavior of the p a r t i c i p a n t s .
C o u n t r i e s can peg t h e i r c u r r e n c i e s or p e r m i t them t o f l o a t w i t h o u t a
monetary agreement.

S i m i l a r l y , t h e y can l e n d t o each o t h e r on an ad hoc

b a s i s w i t h o u t any agreement.

So i t i s a p p r o p r i a t e t o consider t h e advantages

t h a t r e s u l t from an agreement.
T r e a t i e s l i k e o t h e r c o n t r a c t s o f f e r t h e advantage t h a t each p a r t i c i p a n t
can have g r e a t e r confidence i n t h e a c t i o n s t h a t o t h e r p a r t i c i p a n t s might
t a k e i n p a r t i c u l a r circumstances.

The r u l e s t h e n tend t o c o n s t r a i n what might

be c a l l e d — r a t h e r l o o s e l y — t h e pressures o f market f o r c e s ,

For example, under

t h e pegged r a t e system, d i s t u r b a n c e s might cause a currency t o weaken or
s t r e n g t h e n ; t h e r u l e s l i m i t e d t h e movements i n t h e r a t e .
T h i s c o n f l i c t between r u l e s and market f o r c e s i s e v i d e n t i n t h e U , S ,
p o l i c y i n r e c e n t y e a r s toward g o l d and t h e system o f pegged exchange r a t e s .
Much o f t h e U . S . energy i n i n t e r n a t i o n a l monetary r e l a t i o n s i n t h e 1960*s
was an attempt t o adhere t o a. g o l d p a r i t y and a s e t o f exchange r a t e s
were becoming i n c r e a s i n g l y i n c o n s i s t e n t w i t h market f o r c e s .

that

I n the 1960*3,

t h e t h r u s t o f U . S . p o l i c y was t o a v o i d a change i n t h e d o l l a r p r i c e o f g o l d .
There was a g o l d shortage i n t h a t t h e p r i v a t e demand and f o r e i g n
demand exceeded new p r o d u c t i o n ^ g o l d was becoming i n c r e a s i n g l y
and only U . S . g o l d s a l e s m a i n t a i n e d t h e p r i c e a t $ 3 5 .

76-795 O - 76 - 8




official

under-priced?

E v e n t u a l l y , as U . S .

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-It-

g o l d h o l d i n g s d e c l i n e d , and measures t o d e v i s e s u b s t i t u t e s f o r gold proved
l e s s t h a n completely s u c c e s s f u l , i t

became necessary t o acqui'ese t o market

f o r c e s , and cease pegging t h e p r i c e o f g o l d .
I n t h e l a t e 1 9 6 0 ' s and e a r l y 1 9 7 0 ' s , as t h e U . S . i n f l a t i o n

rate

i n c r e a s e d r e l a t i v e t o r a t e s i n o t h e r i n d u s t r i a l c o u n t r i e s , t h e d o l l a r became
progressively overvalued.

Market pressures i n d i c a t e d t h a t exchange p a r i t i e s

would have t o be changed.

The U . S . a u t h o r i t i e s , a f t e r b e l a t e d l y

recognizing

t h a t a r e a l i g n m e n t o f p a r i t i e s was n e c e s s a r y , sought t o avoid any U . S .
initiative.

F o r e i g n a u t h o r i t i e s g e n e r a l l y were no more e a g e r .

E v e n t u a l l y a new s e t o f r a t e s was n e g o t i a t e d i n t h e Smithsonian
Agreement.

But t h e market p r e s s u r e s , i n t h e form o f d i v e r g e n t r a t e s

of

p r i c e i n f l a t i o n i n t h e major i n d u s t r i a l c o u n t r i e s , meant t h a t t h e p a t t e r n o f
r a t e s n e g o t i a t e d i n Smithsonian was o b s o l e t e almost as soon as i t was
negotiated.
Throughout 1 9 7 2 , U . S . p o l i c y remained committed t o s t a b l e b u t
able rates.
rates.

A year l a t e r , U . S . p o l i c y was s t r o n g l y committed t o

adjust-

floating

F l o a t i n g r a t e s came about not because o f p l a n or d e s i g n , b u t because

pegged r a t e s were not f e a s i b l e , s i n c e t h e y were no l o n g e r c r e d i b l e .

Investors

had l o s t confidence i n t h e statements o f n a t i o n a l a u t h o r i t i e s t h a t t h e

parities

would be m a i n t a i n e d — a l l t o o f r e q u e n t l y such statements had, because o f t h e
exigences o f market f o r c e s , proved i n o p e r a t i v e .
I n 1973 and 197^, t h e swings i n exchange r a t e s — e s p e c i a l l y between t h e
d o l l a r and t h e mark—were v e r y Taxge, much l a r g e r t h a n would have been p r e d i c t e d from changes i n r e l a t i v e p r i c e l e v e l .

Observers were concerned t h a t

such l a r g e swings would d e t e r i n t e r n a t i o n a l t r a d e and i n v e s t m e n t , and perhaps
impart an i n f l a t i o n a r y b i a s by r a i s i n g t h e p r i c e o f i m p o r t s .

The U , S ,

a u t h o r i t i e s were extremely r e l u c t a n t t o i n t e r v e n e i n t h e exchange market




Ill
-5-

t o dampen t h e range o f r a t e movements.
W i t h i n two or t h r e e y e a r s , U . S . p o l i c y had gone from t h e extreme o f
a t t e m p t i n g t o f o r e s t a l l v a r i a t i o n s i n t h e exchange r a t e t o t h e extreme
.of c o n s i d e r i n g i t u n d e s i r a b l e t o dampen r a t e movements.

I n the f i r s t

case,

t h e adjustments i n exchange p a r i t i e s were t o o l o n g d e l a y e d ; i n t h e second,
t h e movements i n exchange r a t e s were t o o l a r g e and t o o sudden.

I n part the

sharp s h i f t i n t h e U . S . p o s i t i o n from a s t r o n g support o f pegged r a t e s t o a
sharp support o f f l o a t i n g r a t e s r e f l e c t s a retrenchment i n U . S .
commitments—or i n t h e U . S : view o f i t s

international

commitments.

U . S . i n t e r n a t i o n a l f i n a n c i a l p o l i c y has not been a success, i n t h a t
.costs have been i n c u r r e d t o a v o i d changes t h a t were p r o b a b l y
These costs v a r i e d .

Some wasted t h e t a x p a y e r ' s money, l i k e

Milwaukee beer t o Munich.

inevitable.
shipping

Some reduced c r e d i b i l i t y o f U . S . commitments f o r

statements were made t h a t would soon be proven i n c o r r e c t .

The U . S .

alliance

r e l a t i o n s h i p s were weakened, s i n c e undue pressures were p l a c e d ' o n o t h e r
c o u n t r i e s t o do something about t h e balance o f payments t h a t must have
reduced t h e i r w i l l i n g n e s s t o make o t h e r accommodations t o U . S .

requests.

And t h e p o l i c y impasse about changing p a r i t i e s i n t h e 1 9 6 9 - 7 1 p e r i o d was
a major cause o f t h e Great I n f l a t i o n two y e a r s l a t e r .
A major e r r o r i n U . S . p p l i c y has b^en i t s s t a n d - p a t i s m — i t s

failure

t o a p p r e c i a t e t h e s t r e n g t h o f market f o r c e s , and t h e e x a g g e r a t i o n o f t h e
s t r e n g t h o f r u l e s i n r e s i s t i n g market f o r c e s ;

Almost i n e v i t a b l e ,

the

l a r g e s t country i n t h e system i s l i k e l y t o have a s t r o n g e r i n t e r e s t
t h e s t a t u s quo t h a n o t h e r . c o u n t r i e s , and f o r s e v e r a l reasons.
c r e d i b i l i t y i s much more i m p o r t a n t t o a l a r g e country t h a n t o

in

One i s t h a t
smaller

c o u n t r i e s ; t h e l a r g e country i s l i k e l y t o p l a c e g r e a t e r v a l u e i n commitments.
Moreover t h e l a r g e s t country has a l a r g e i n t e r e s t i n t h e s t a b i l i t y
system.




ofvthe

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-6-

The second U . S . p o l i c y e r r o r has been t h e f a i l u r e t o r e c o g n i z e t h e
e x t e r n a l consequences o f U . S . domestic b e h a v i o r and e s p e c i a l l y t h e U . S .

role

as a source o f monetary d i s t u r b a n c e s ; t h e U . S . i n f l a t i o n and t h e l o n g d e l a y
i n changing p a r i t i e s vas a major cause o f t h e breakdown i n t h e B r e t t o n Woods
system o f pegged exchange r a t e s .

It

i s g e n e r a l l y accepted t h a t t h e payments

balance or t h e exchange r a t e ought not t o prove a b a r r i e r i n s e l e c t i n g t h e appr o p r i a t e domestic p o l i c i e s .

But t h a t p r o p o s i t i o n does not mean t h a t t h e U n i t e d

S t a t e s should i g n o r e t h e consequences on o t h e r c o u n t r i e s o f
domestic U . S .

inappropriate

policies.

That t h e U n i t e d S t a t e s i s t h e l a r g e s t s i n g l e c o u n t r y i n t h e
system has s e v e r a l important i m p l i c a t i o n s f o r t h e n e g o t i a t i o n s on monetary
arrangements i n t h e f u t u r e .

One i s t h a t U . S . economic p o l i c y i s much t h e

most i m p o r t a n t i n d e t e r m i n i n g t h e economic s t a b i l i t y o f t h e s y s t e m — i n t h e
changes i n t h e w o r l d p r i c e l e v e l .

The second i s t h a t t h e r u l e s a r e

inevit-

a b l e designed t o c o n s t r a i n U . S . b e h a v i o r , and so t h e concern i s whether t h e
U n i t e d S t a t e s w i l l agree t o a s e t o f r u l e s t h a t might be more c o n s t r a i n i n g
on t h e U n i t e d S t a t e s t h a n on o t h e r s .

(The n e g o t i a t i o n s l e a d i n g t o t h e B r e t t o n

Woods system were a t y p i c a l , f o r g i v e n t h e tremendous dependence o f o t h e r
c o u n t r i e s on t h e U n i t e d S t a t e s , t h e y were n o t i n a p o s i t i o n o f b a r g a i n i n g
equality.)

The t h i r d f a c t o r i s t h a t t h e U n i t e d S t a t e s i s t h e most i m p o r t a n t

country when t h e r u l e s o f t h e system a r e t o be n e g o t i a t e d ; i f t h e U n i t e d S t a t e s
can no l o n g e r hope t h a t i t s recommendations w i l l be r e a d i l y a c c e p t e d , by o t h e r
c o u n t r i e s , i t r e t a i n s a f o r m a l and i n f o r m a l v e t o over t h e i r

initiatives.

And so t h e U n i t e d S t a t e s must be concerned w i t h which c o n s t r a i n t s i t
accept on i t s choice o f measures because a w i d e r i n t e r e s t i s

might

served.

I t i s f r e q u e n t l y suggested t h a t pegged exchange r a t e s inay impose a cons t r a i n t on t h e choice o f domestic p o l i c y , and hence impose a c o s t .
t h e $35 gold p a r i t y was s a i d t o be a c o n s t r a i n t .




Similarly,

Both commitments p r o v i d e d

113
-7-

o t h e r i n d u s t r i a l c o u n t r i e s w i t h somewhat g r e a t e r confidence about t h e movements i n exchange r a t e s .
As we look beyond t h e Jamaica Agreement, two r e s p o n s i b i l i t i e s f a l l on
the United States.

One i n v o l v e s f o l l o w i n g t h e domestic economic p o l i c i e s

t h a t a r e a p p r o p r i a t e f o r i n t e r n a t i o n a l economic s t a b i l i t y .

The second i s

t h a t o f p a r t i c i p a t i n g i n i n s t i t u t i o n a l arrangements t h a t w i l l enhance t h e
s t a b i l i t y o f i n t e r n a t i o n a l f i n a n c i a l arrangements.
are closely t i e d .

These two p r o p o s i t i o n s

Unless U . S . domestic economic p o l i c i e s r e s u l t i n

stability,

. e f f o r t s t o s t a b i l i z e t h e system by new i n s t i t u t i o n a l arrangements w i l l not be
successful.

I f domestic

p o l i c e s a r e s u c c e s s f u l , t h e n t h e costs t h a t f a l l on

t h e U n i t e d S t a t e s o f measures t o enhance t h e s t a b i l i t y o f t h e system w i l l be
small.

The r e s p o n s i b i l i t y f o r s t a b i l i z i n g economic p o l i c y l a y s no a d d i t i o n a l

burden on t h e U n i t e d S t a t e s — w h a t i s good f o r U . S . domestic economic p o l i c y
i n terms o f measures f o r a p p r o p r i a t e p r i c e and employment t a r g e t s i s good f o r
the rest of the world.
I f t h e U n i t e d S t a t e s i s not s u c c e s s f u l i n s t a b i l i z i n g i t s own economy,
so t h a t t h e i n f l a t i o n r a t e drops and t h e c y c l i c a l v a r i a t i o n s i n income
d e c l i n e , t h e i n t e r n a t i o n a l monetary arrangements w i l l not prove stab3re^
and e f f o r t s t o d e v i s e new i n s t i t u t i o n a l arrangements a r e l i k e l y t o be wasted,
• I f t h e U n i t e d S t a t e s s t a b i l i z e s i t s own economy, t h e r e a r e a d d i t i o n a l
p a y o f f s t o p a r t i c i p a t i n g i n i n s t i t u t i o n a l arrangements which s t a b i l i z e
i n t e r n a t i o n a l markets.
s t a b l e arrangements.
employment.

The U . S . n a t i o n a l i n t e r e s t i s served by o r d e r l y and
Such arrangements f a c i l i t a t e t r a d e and h i g h l e v e l

Otherwise U . S . t r a d i n g p a r t n e r s w i l l be s u b j e c t t o

rounds o f i n f l a t i o n and r e c e s s i o n .

alternate

F o r e i g n governments w i l l f i n d

it

d i f f i c u l t t o cope w i t h these shocks, t h r e a t e n i n g t h e i r a b i l i t y t o govern,
From t i m e t o t i m e , t h e U n i t e d S t a t e s may f i n d i t s i n t e r e s t served by t h e




114
-8-

e x t e n s i o n o f c r e d i t t o another government, e i t h e r d i r e c t l y or through an
international financial intermediary.

Such c r e d i t w i l l f a c i l i t a t e

adjustment t o shocks, b o t h shocks l i k e w o r l d r e c e s s i o n or t h e o i l
i n c r e a s e , or domestic shocks l i k e crop

the
price

failure.

As major i n d u s t r i a l c o u n t r i e s s t a b i l i z e t h e i r p r i c e l e v e l s ,
r a t e s w i l l f o l l o w a more s t a b l e p a t t e r n .

exchange

C o u n t r i e s t h a t want t o peg t h e i r

c u r r e n c i e s w i l l be a b l e t o do so.
Even b e f o r e exchange r a t e s s t a b i l i z e , however, t h e U n i t e d S t a t e s should
take the i n i t i a t i v e i n s t a b i l i z i n g the gold market.
monetary h i s t o r y .

Gold has a l o n g and

C e n t r a l banks h o l d about $150 b i l l i o n o f g o l d i n

r e s e r v e s ( v a l u e d a t $100 an ounce).

their

E f f o r t s t o demonetize g o l d can o n l y be

d i s r u p t i v e ; even t h e IMF g o l d s a l e s f o r t h e T r u s t Fund a r e u n s e t t l i n g .
Gold i s i m p o r t a n t i n t h e r e s e r v e s o f o t h e r c o u n t r i e s .
i n t e r e s t by sharp changes i n g o l d p r i c e .
and a t t h e p e r i p h e r y o f t h e system.




No i m p o r t a n t U , S ,

Gold can remain a monetary a s s e t

115
Senator PRQXMIRE. Thank you very much.
Our final witness is M r . Sidney Brown.
M r . Brown.
STATEMENT OF SIDNEY BROWN, VICE PRESIDENT AND ECONOMIST,
EDITOR OP THE DEAK-PERERA REPORT, DEAK & CO., INC.
Mr. BROWN. M y remarks w i l l be very short.
I would like to stress that I am speaking for myself and not for
Deak&Co.
As you know, i t is always to the advantage of foreign exchange
traders to have a highly volatile foreign exchange market and not a
stable one.
The latter is what I happen to endorse.
I was cognizant of the excellent questions Senator Stevenson had
in the Congressional Eecord w i t h regard to the hearings.
I thought they were superb and something I would like to see
students and professors address themselves to.
Because of the shortness of time and all other consideration, I
thought I would go to the heart of those questions that were raised.
There are two reasons as to why the proposed amendments to the
International Monetary Fund should be postponed. The delay should
last until the ambiguous, vacuous, and contradictory revisions are
cleared up.
Then, and only then, would Congress be able to know what i t is
voting for, clearly and not blindly.
As presently advanced, the amendments would legalize the present
foreign exchange rate confusion and unnecessary turmoil. They are
hardly an improvement over what the present Bretton Woods system
provides, i f implemented.
Currency devaluations and central banking interventions, since
floating commenced, have been on a scale that far surpasses the worst
that occurred under pegging.
Moreover, a firmer hand on the I M F tiller and deficit member
countries' willingness to submit to the Fund's lending conditions would,
i n my opinion, have provided a viable, practical, and efficient international monetary system.
Reason No. 1 is found in amended article I V , section 1. I t deals w i t h
members' obligations. Each member is obligated to "assure orderly
exchange arrangements," and at the same time "promote a stable system of exchange rates."
The phrase "orderly exchange arrangements" is a euphemism for
complete freedom, as is done illegally now, to select any kind of an
exchange rate system any member desires, legally.
For example, some members, as they now do, can peg their currencies to the U.S. dollar, or to a basket of currencies using a formula
of their own making.
O r they can latch on to the SDR. Some members have allowed their
currencies to float independently, and others have agreed their
currencies should float jointly.
As confusing as this may be, and i t is, even though we are concerned
here w i t h major countries, the degree to which there may be clean
or d i r t y central bank intervention i n the foreign exchange markets,




116
and nonmonetary restrictions, complicates the chaos even more, i f that
is possible.
Business internationally can live w i t h this confusion, but no one
denies that i t has added unnecessarily to costs, wasted resources, and
complicated financing.
Even i n times of catastrophe, business can manage to perform and
even prosper, but that is not, f r o m an economic viewpoint, the system
under which business should be forced to operate.
Even i f the above confused situation could be ignored, there still
remains the other permissible obligation, to promote a stable system
of exchange rates.
H o w the two can be reconciled is difficult to imagine.
One, you permit a member to select any k i n d of an international
exchange rate system, and, two, you ask that the member pursue a stable rate system.
To resolve this incompatibility, the drafters presented the followi n g theory as to how i t can be done. The amendment calls upon members to conduct internal economic and financial policies i n such an
orderly and sound manner that no matter what exchange rate system
they elect, a stable exchange rate system would automatically evolve.
Even under a pegged rate system, however, countries would have to
also foster stable, noninflationary growth policies to maintain their
currencies' strength.
However, without the mandatory requirements of remaining i n
the pegged band permitted, they would not have the compulsion that
is missing i n the permissible system of choice granted i n the
amendment.
The administration places a great deal of confidence i n that obligation which calls upon members to refrain from avoiding exchange
rate manipulation to prevent balance-of-payment adjustment or to
gain an unfair competitive advantage.
This is strange confidence indeed, one without teeth, because the
drafters left out the June 1974 international monetary reform proposals calling for floating exchange rate guidance involving graduated pressures and various indicators to prevent or stop just that,
that is, manipulation.
Actually, section 1 is a paean to naivete and permissiveness.
The greatest amount of faith the administration places on the workability of the proposed amendments is to be found i n section 3 of the
same article. I t calls upon the Fund to also do the impossible.
The Fund, i t says, "shall exercise firm surveillance over the exchange rate policies of members (sic)."
Moreover, the Fund "shall adopt specific principles for the guidance of all members w i t h respect to those policies."
Congress would be buying a pig-in-the-poke i f i t voted for statutory change without knowing i n advance exactly what specific principles the drafters have i n mind.
I n addition, just what constitutes firm surveillance inasmuch as the
June 1974 stab at international monetary reform w i t h teeth has been
quietly and conveniently buried as a lost cause.
The saddest feature of the revision is the most incongruous. A f t e r
all the homilies have been paid to relying on the good, unselfish nature
of the major competitive nations, to bring about a so-called superior




117
international monetary system, the policeman's hands are tied to make
sure that under no circumstance could i t crack down on an errant
member.
The F u n d is directly and distinctly informed that its vague firm
surveillance and specific principles powers cannot stand i n the way
of a country's domestic social and political policies.
Under those terms when, i f ever, could the F u n d apply any conditionalities to any credit tranche drawings ?
The authors of the revision, i n promising everything and anything
to any member, claim that the central tneme throughout the proposals governing exchange arrangements is freedom of choice for
members, but not freedom of behavior.
I t makes a good political slogan u n t i l carefully examined. Upon
examination, i t turns out that you cannot have your cake and eat it,
too.
The one is 180° the opposite of the other, and there is only a powerless Fund, hardly able to give priority of one over the other.
A n d even i f i t could, the other permissive provisions effectively tie
its hands.
The second reason calling for postponement is to settle the question as to whether the SDR w i l l serve as an international standard
of value when i t is not "the" or " a " key currency.
I n an attempt to represent f a i r l y the major 16 currencies i n the
weighted basket, of which the SDR is the total sum, the dollar's weight
dominates, making the SDR an impractical measure, or standard of
value.
I n a recent publication i t was pointed out that the three SDR-denominated bond issues are selling at anywhere f r o m 75 to 125 basis
points higher yield than comparable maturities specified or denominated i n dollars and deutsche marks.
This is, I think, fitting testimony to the fact that SDR-denominated
issues are not acceptable i n the private markets.
To get back to my statement.
I n addition, the SDR measures the currencies which, i n turn, measure the SDR. I t is a vicious circle as though feverish patients would
cite their symptoms and the sum total of the symptoms would measure their fever. The SDR hardly qualifies as an objective standard
like a thermometer, or a yardstick, or gold at a fixed price under a
redeemable gold standard.
I n demonetizing and displacing gold, the drafters removed the
gold content of the SDR. A n d once the United States was unwilling,
or anyone else, singly or jointly, to buy and sell gold to keep its price
fixed, there no longer was a North Star for the settlement of transactions.
Detaching gold f r o m the SDR, then, has worsened, not helped,
matters.
U n t i l a better standard of reference can be created, then i t would
be, i n my opinion, wise to postpone this crucial legislation on which
all the other amendments rest.
The wiser course at this point, I would submit, is the resurrection
of the Bretton Woods system—with teeth.
Thank you.
[Complete statement follows:]




118
1&3EPAKED S T A T E M E N T BY S I D N E Y B R O W N , V I C E P R E S I D E N T A N D E C O N O M I S T , D E A R
& O o . , I N C . , N E W Y O R K , N . Y . , A N D EDITOR, D E A K - P E R E R A REPORT

I should like to call attention to two reasons as to why the proposed amendments to the International Monetary Fund charter should be postponed.
The delay Should last until the ambiguous, vacuous and contradictory revisions are cleared up. Then, and only then, Congress would be able to know what
it is voting for, clearly and not blindly.
As presently advanced, the amendments would legalize the present foreign
exchange rate confusion and unnecessary turmoil. They are hardly an improvement over what the present Bretton Woods System provides, if implemented.
Currency devaluations, and central banking interventions, since floating
commenced, have been on a scale that far surpasses the worst that occurred
under pegging. Moreover, a firmer hand on the I M F tiller and member countries* willingness to submit to the Fund's lending conditions would, in my opinion, have provided a viable, practical and efficient international monetary
system.
Reason number one is found in amended article IV, section 1. I t deals with
member's obligations. Each member is obligated to "assure orderly exchange
arrangements", and at the same time, "promote a stable system of exchange
rates."
The phrase orderly exchange arrangements is a euphemism for complete freedom, as is done illegally now, to select any kind of an exchange rate system any
member desires, legally. For example, some members, as they now do, can peg
their currencies to the U.S. dollar, or to a basket of currencies using a formula
of their own making. Or, they can latch on to the SDR. Some members have
allowed their currencies to float independently, and others have agreed their
currencies should float jointly.
As confusing as this may be, and it is, even though we are concerned here with
major countries, the degree to which there may be clean or dirty central bank
intervention in the foreign exchange markets, and non-monetary restrictions,
complicates the chaos even more, if that is possible. Business internationally
can live with this confusion, but no one denies that it has added unnecessarily
to costs, wasted resources, and complicated financing. Even in times of catastrophe, business can manage to perform and even prosper, but that is not, from
an economic viewpoint, the system under which business should be forced to
operate.
Even if the above confused situation could be ignored, there still remains the
other permissible obligation, to promote a stable system of exchange rates. How
the two can be reconciled is difficult to imagine. One, you permit a member to
select any kind of an international exchange rate system and, two, you ask that
the member pursue one kind of a system.
To resolve this incompatibility, the drafters presented the following theory
as to how it can be done. The amendment calls upon members to conduct internal economic and financial policies in such an orderly and sound manner that
no matter what exchange rate system they elect, a stable exchange rate system
would automatically evolve.
Even under a pegged rate system, countries would have to, also, foster stable,
non-inflationary growth policies to maintain their currencies' strength. However, without the mandatory requirements of remaining in the peeged band
permitted, they would not have had the compulsion that is missing in the permissible system of choice granted in the amendment.
The Administration places a great deal of confidence in that obligation which
calls upon members to refrain from avoiding exchange rate manipulation to
prevent balance of payment adjustment or to gain an unfair competitive advantage. This is strange confidence indeed, one without teeth, because the drafters
left out the June, 1974, international monetary reform proposals calling for
floating exchange rate guidance involving graduated pressures and various indicators to prevent, or stop, just that, i.e., manipulation.
Actually, Section 1 is a pean to naivete and permissiveness.
The greatest amount of faith the Administration places on the workability of
the proposed amendments is to be found in Section 3 of the same article. I t calls
upon the Fund to also do the impossible. The Fund, it says, "shall exercise firm
surveillance over the exchange rate policies of members (sic)." Moreover, the
Fund."shall adopt specific principles for the guidance of all members with respect
to those policies."




119
Congress would be buying a "pig-in-the-poke" if it voted for statutory change
without knowing in advance exactly what specific principles the drafters have in
mind. I n addition, just what constitutes "firm surveillance" inasmuch as the
June, 1974, stab at international monetary reform with teeth has been quietly and
conveniently buried as a lost cause.
The saddest feature of the revision is the most incongruous. After all the homilies have .been paid to relying on the good, unselfish nature of the major competitive nations, to bring about a so called superior international monetary
system, the policeman's hands are tied to make sure that under no circumstance
could it crack down on an errant member.
The Fund is directly and distinctly informed that its vague "firm surveillance"
and "specific principles" powers can not stand in the way of a country's domestic
social and political policies. Under those terms, when, if ever, could t)le Fund
apply any "conditionalities" to any credit tranche drawings?
The authors of the revision, in promising everything and anything to any
member, claim that the central theme throughout the proposals governing exchange arrangements is freedom of choice for members, but not freedom of behavior. I t makes a good political slogan until carefully examined. Upon examination, it turns out that you can't have your cake and eat it, too. The one is 180
degrees the opposite of the other, and there is only a powerless Fund, hardly able
to give priority of one over the other. And even if i t could, the other permissive
provisions effectively tie it hands.
The second reason calling for postponement is to settle the question as to
whether the SDR will serve as an international standard of value when it is not
"the", or "a", key currency. I n an attempt to fairly represent the major 16
currencies i n the weighted basket, of which the SDR is the total sum, the dollar's
weight dominates, making the SDR an impractical measure, or standard, of
value.
I n addition, the SDR measures the currencies which, in turn, measure the
SDR. It's a vicious circle as though feverish patients would cite their symptoms
and the sum total of the symptoms would measure their fever. The SDR hardly
qualifies as an objective standard like a thermometer, or a yardstick.
I n demonetizing and displacing gold, the drafters removed the gold content
of the SDR. And once the United States was unwilling, or anyone else, singly or
jointly, to buy and sell gold to keep its price fixed, there no longer was a North
Star for the settlement of transactions. Detaching gold from the SDR, then, has
worsened, not helped, matters.
Until a better standard of reference can be created, then it would .be in my
opinion wise to postpone this crucial legislation, on which all the other amendments rest.
The wiser course at this point, I would submit, is the resurrection of the
Bretton Woods System—with teeth.

Senator PROXMIKE. Thank you very much, all of you gentlemen.
I have a whole series of questions. I t is just a shame that we have
had these interruptions and that we have had to take so long.
I know Senator Helms is al«o having problems today, so I am going
to yield to him first and then I w i l l ask questions.
Senator HELMS. M r . Chairman, I thank you.
I sit i n some awe of such a distinguished panel. Y o u are a vast source
of information which w i l l be most helpful.
First of all, I would like to know your perception of the possible or
probable inflationary impact of the increase i n I M F quotas inasmuch
as more money w i l l be going out to recipient nations.
I t doesn't matter who responds first.
M r . BROWN. I would say that i t would be a step toward additional
international monetary inflation.
Senator HELMS. Does any other member of the panel disagree?
M r . ALIBER. I would predict that the impact on the rate of inflation
would be zero.
M r . ROOSA. I would agree w i t h Aliber.




120
M r . B E N N E T T . Senator, I don't think i t is appropriate to look just
at the increase i n quotas separate from the other provisions. I t is a
package deal.
I am sure the total package assists i n fighting inflation and would
reduce it.
M r . B I R N B A U M . The one-third increase i n I M F quotas is really a
small, though helpful, addition to world monetary resources i n my
opinion, as compared w i t h the existing totals of world l i q u i d i t y ; the
grand totals of I M F resources beyond just this increase is s t i l l relatively small.
I f the F u n d is to continue to carry out its important function of
extending conditional credit to countries, that is, credit that is preconditioned on the adoption of sensible though sometimes politically
difficult economic policies on the part of borrowing countries, then i t
needs liquid resources to be credible and effective.
M r . BROWN. I f I may just say that i f M r . Birnbaum is qualifying
his answer w i t h the word "small," I would, too. I suppose i t is a small
step.
B u t i n terms of even the expert testimony of M r . H . Johannes
Witteveen, Managing Director of the I M F , the world is surfeit w i t h
international liquidity.
I n fact, he's called for I M F international control of international
liquidity, something which the United States and all other member
countries have apparently turned down.
This quota increase is again another piece of evidence that we are
creating money ahead of production. A n d this, I think, is the saddest
part about monetary inflation. W h y money inflation leads to price
inflation requires, of course, a thorough explanation and we don't have
the time for that this morning.
Senator H E L M S . I share the chairman's view. I wish we could have
had a substantial period of time to go into this w i t h these gentlemen.
This is a blue-ribbon panel i f I ever saw one.
W i t h your indulgence, M r . Chairman, I have two or three other
questions.
Perhaps this has been touched on, but just for my edification, would
you tell me what you think w i l l happen i f the I M F b i l l is not approved
by the Congress this session and is carried over u n t i l next year?
M r . Brown?
M r . BROWN. Obviously this current floating travesty of international law, which certainly ranks i n monetary history as one of the
United States black marks, w i l l continue while awaiting legalization.
I would also say, i f I were asked this question, that we should do as
Switzerland has refused to do; that is, we should resign f r o m the
International Monetary Fund.
Senator HELMS. I believe I am correct i n saying previous to 1967,
the increases i n the I M F subscription required regular appropriations.
Now they don't. We put the Export-Import Bank into budget, we put
the I D A and a host of other aid organizations i n the budget.
Should not this go i n the budget? Don't its loans have the same
economic effect as international expenditures?
M r . BROWN. Senator Helms, I think others on the panel would also
like an opportunity to reply to your second question.
Senator H E L M S . I am sorry; please proceed.
Senator PROXMIRE. I think' M r ; Koosa wanted tb reply.




121
Senator HELMS. Good. Let us go back to the previous question, then.
M r . EOOSA. I feel that the risks of not approving the legislation now
are of two kinds.
First, that the longer we continue without legitimizing procedures
which are i n their nature inevitably imposed by changed world conditions, the longer we lose an opportunity to provide some agreed form
of surveillance over the way i n which these new freedoms and these
new risks of abuse are conducted.
So that I feel every day that passes without moving toward strengthening the multinational surveillance of the way these new freedoms
are carried out adds to danger.
I n that sense, that is where I think the real risk of additional inflation or, on the other hand, perhaps breakdown i n the functioning
of international payments, are real possibilities.
But I think the second is that we do need the increase i n I M F
quotas for the reason M r . Birnbaum has indicated.
This would get into the technicalities of the way i n which quotas are
calculated and the way i n which individual countries have the opportunity to draw, but the crucial part is that the Fund as now constituted w i t h its present quotas would not be able to do as much i n a
situation of great strain for many of the less developed countries to
provide the k i n d of conditional credit that helps to impose the discipline that many of the people in charge of these countries would like
to impose, but under domestic political pressures they need the additional help of being assured that they can get some credit, so that
their own nation can proceed under more effective domestic performance to then take part i n the world economy.
They need much that can only be accomplished i f they are able to
prove to their own people, or point out to their own people, the fact
that this hinges on outside conditional assistance of the k i n d the F u n d
provides. That is, the assistance comes on terms that provides, i f you
want to put i t crudely, responsible domestic leaders w i t h the excuse
they need to take the domestic action which they would like to take,
but for which they need the additional support indicated by the I M F
representing the whole world community.
So I think that for both of these reasons i t is important to get the
legislation out.
Jack?
M r . BENNETT. I would like to add, Senator, that failure of the Congress to act this time on an agreement which was negotiated over so
long a period after so much consultation i n the Congress, would seriously undermine the willingness of other countries to enter into cooperative international endeavors w i t h us.
This, taken together w i t h other past failures to carry through on
what has been negotiated; would be a serious blow to international
cooperation.
M r . ALIBER. I would like to make just three brief remarks.*
First, I would like to see the legislation passed this year.
Second, i f you asked i f the legislation were not passed, would the
underlying economics of the world be significantly different or would
the economic situation i n many LDC's or most be significantly
different?




122
I would have to say no. B u t I t h i n k the t h i r d reason for passing the
legislation is linked to the suggestion that M r . Brown gave, that the
tJnited States might resign f r o m the I M F .
I t is like suggesting we resign f r o m the world. I think i t is premature to make that suggestion.
We have been involved i n this negotiation. B i g bets have been
placed and little cost appears to be attached to passing the legislation
at this time.
M r . BROWN. Switzerland is not a member, we are.
M r . ALIBER. Switzerland is barely a member of the world.
M r . KOOSA. Switzerland has specifically and repeatedly insisted
through its central bank and its government that i t does not want to
undertake any of the kind of responsibility or participation i n the
international monetary system that the United States cannot escape
and most of the rest of the world requires.
This is a matter of record.
M r . B R O W N . I suspect i f the United States were to pursue the policies
that are idealistically called for i n the proposed amendments that we
should, on our own, reestablish the dollar as the Swiss have established
the Swiss franc, and I think this would be one of the finest things we
could do f o r the rest of the world.
M r . B I R N B A U M . I n the interest of time, Senator Helms, I won't
comment further on your question.
Senator PROXMIRE. Your t h i r d question, Senator Helms, was not
answered.
Senator HELMS. That's right. Do you have any opinion about that?
Senator PROXMIRE. Putting this into the budget.
M r . BROWN. I am disturbed by several recent developments. B u t m y
short answer is, yes, i t should be i n the budget. I would like to just
digress a moment and comment on the recent Export-Import Bank
financing arrangement w i t h the National Power Corp. i n the P h i l i p pines where they put the ukase of the U.S. Government into a private,
publicly offered bond carrying the f u l l f a i t h and credit pledge of the
U.S. Government. I think i t is $367 million maturing f r o m 1987 to
1991.
Incidentally, unlike any registered SEC prospectus, there is nothing
any investor could ascertain about that particular company except
the U.S. Government has promised to pay principal and interest when
due i n the event of any default. The U.S. Government is a co-signer.
Certainly things like this which are off-budget items should be put
into the budget.
I understand that as of March 31, 1976, approximately $177 billion of such guaranteed issues were outstanding. That, I understand,
excludes even off-budget Federal agencies,
M r . B I R N B A U M . Senator Helms, i n regard to this question, I t h i n k i t
might be important to make clear the fact that when we subscribe to
an increased U.S. quota i n the I M F , that i t is not the intent, as i t is f o r
items included i n the budget, to spend these moneys for goods and
services or Government spending programs, or for programs involving
the loan of funds that are going to be repaid, let's say, only pver a long
period of years.
Rather, the U.S. quota i n the F u n d represents a potential f o r m of
foreign exchange reserve of the United States. When other member
countries i n the I M F draw on the quota that we have subscribed to i n




123
the I M F , then to the extent that they draw dollars, the United States
correspondingly receives an increased automatic right to draw an
equal amount of foreign exchange reserves from the I M F .
So the U.S. quota i n the Fund is a different animal than budgeted
expenditures.
I t is more i n the nature of, let us say, acquiring gold which is added
to our official reserves.
One might exchange dollars for gold or exchange gold for dollars.
I n this instance, we are exchanging the right of other I M F members
to draw dollars f r o m the I M F for a corresponding right for the
United States to draw an equal value of currencies of other members
from the I M F . This right is known as the so-called super tranche. I t is
.automatic, and therefore enables us to obtain from the I M F the
reserves we may need, to the extent that other countries may have
drawn upon the dollars we made aavilable to the I M F through our
quota subscription.
Senator HELMS. So we have some differences of opinion.
M r . Chairman, could we have & show of hands? I would just like to
see a referendum on this question just for my own information.
Who feels the subscription should be i n the budget ?
[One hand raised.]
Senator H E L M S . I take i t the other five do not.
M r . ALIBER. I abstain.

Senator HELMS. M r . Chairman, I promise I w i l l be through i n a
minute.
I notice that the loan authority requested i n the bill, $2 billion at the
Secretary's discretion, is authority to lend funds that have been
appropriated.
Do you not feel that the other funds to the I M F be appropriated,
too?
Anybody want to tackle that one ?
M r . SALANT. I am not sure I understand the question. What other
funds are you referring to ?
Senator HELMS. The $2 billion under the 1962 agreement.
Now this is—at the Secretary's discretion.
M r . B I R N B A U M . That is the so-called general arrangements to borrow, the G A B , Senator ?
Senator HELMS. Yes.

M r . B E N N E T T . I think, M r . Chairman, this question is really the
same as your previous one.
Senator PROXMIRE. Speak a little more loudly, M r . Bennett. We
can't hear you.
M r . B E N N E T T . I don't see any distinction between this question and
the one you just put, whether the increase i n the quota should be
appropriated.
Senator H E L M S . I see.
Now, M r . Chairman, I would like to hear the comments of the panel
on a proposal relating to gold.
As you know, Congress legalized the ownership of gold on the I n ternational Development Association b i l l i n 1974, but i t did not
legalize gold clause contracts.
This is a contract i n which payment can be required i n gold or dollars measured i n gold.




124
I would like to hear your views on whether we should consider putt i n g such a rider on to a b i l l such as the I M F .
Senator PROXMIRE. W e w i l l start w i t h M r . Bennett and go r i g h t
down the line.
M r . B E N N E T T . I would recommend against putting such a rider on
this bill.
I am sure the proposal would be extremely controversial and would
cause delay.
On the other hand, I would not oppose separate consideration.
I am concerned by some of the company the proposal keeps i n the
sense that sometimes i t is put forward as part of an effort t o restore
the gold standard, which, as my testimony says, I t h i n k would be a
mistake.
On the other hand, I don't t h i n k that after careful consideration
arid separate legislation, legislating that proposal would have any
great practical effect.
People have seen the instability of the price of gold and are not
going to rush into signing gold contracts.
So at an appropriate time I would see no harm at all.
I don't t h i n k i t should be attached t o this bill.
M r . ROOSA. I would agree w i t h M r . Bennett.
M r . BROWN. I would like to see such a rider attached to this b i l l ,
but not f o r the reasons that M r . Bennett fears, that i t might unduly
prolong the discussion i n Congress, and so on.
I t h i n k i t would remove an "Alice i n Wonderland" condition where
money supposedly can be anything except—well, you just can't use
gold as money.
Y o u can arrange gold or money liquidation of a gold futures contract, but you cannot write up a contract allowing an optional choice
of payment when one of the options is gold this is splitting hairs.
I f you want to exchange gold f o r an automobile, you can't. Y o u
have to t u r n around and sell the gold, get the money and then buy the
automobile. Y o u can't even barter.
I t is even illegal under existing legislation, to barter gold coins, say,
for gold bullion. According to some experts—and there is great controversy over this—you can't.
I t h i n k a legal gold clause contract would resolve these "Alice i n
Wonderland" bewildering situations that we do have, r i g h t now.
Incidentally, I would like to point out that even Federal Reserve
Chairman A r t h u r Burns has reversed his view expressed over a year
ago and said that he himself would not oppose the restoration of that
particul ar privilege.
M r . Bennett and others, I would like to say that you can talk all
you want about the instability of gold, but the instability of gold is
for one reason and one reason only. I t is an accurate thermometer
reflecting the follies of government.
So don't blame gold when i t is unstable.
I t h i n k what you are doing is backing away from the symptoms of
gold. You are not attacking the cause for its instability.
I think gold really exemplifies something that people through history have found to 'be not perfect, not idealistically, but certainly the
best hedge they can have against-governmental stupidities.




125
M r . SALANT. I would not see any point i n such a clause. I must disagree w i t h M r . Brown's last statement that the fluctuation i n the price
of gold reflects the stupidity of governments.
I don't see how the stupidity of governments at whatever absolute
value you place on i t , could have changed so much as to account for
gold having risen to almost $200 and now being almost $100.
Does that stupidity double and then halve i n 2 years ?
I think i t is unlikely.
M r . BROWN. Coming up is an article of mine i n Commodities Magazine which does point out that gold was touted i n 1973 and 1974 like
over-the-counter market stocks were touted i n the 1960's.
Gold was certainly oversold then, but double-digit inflation gave i t
impetus.
As for gold clause contracts, I would still say, yes, to the rider.
M r . ALIBER. I see no reason why Walter Salant should be prohibited
from denominating a debt to me with a gold clause attached to it.
I see no reason for attaching a rider amendment to this b i l l which
might make i t possible for Salant and others to put gold clauses i n
private debts.
I t may very well be true that Government stupidity d i d not double
and then half i n the last year. That is really quite misleading.
The evidence is that fluctuations i n the gold price are related to
expectations about the rate of inflation.
When investors expect the rate of inflation is going to accelerate
we get very sharp increases in commodity prices.
When they expect inflation to decelerate, we get declines i n commodity prices.
So i t is not so much related to stupidity i n government policy, but
i t predicted what government policy was going to be like i n terms of
monetary growth.
M r . SALANT. I didn't mean to suggest that expectations of future
inflation don't have anything to do w i t h it, but the instability of the
price certainly suggests that gold is no firm anchor.
The expectations of future inflation affect the prices of a great
many commodities. But i n general you don't have such fluctuations
i n the average prices of commodities, though you do for some specific
ones.
To tie anything to this one commodity, which is and has been seen to
be quite unstable, would seem to me a mistake.
M r . B I R N B A U M . Being the last on the list, Senator Helms, there is
less for me to say.
Senator HELMS. We w i l l start on the other side for the next question.
M r . B I R N B A U M . I would say as a matter of principle I would not
object to the use of gold clauses in private contracts. However, I do
feel that perhaps i t would be improper to attach a gold clause provision on this bill.
Senator HELMS. One final question.
I am concerned about the interest rate on these loans. I f inflation
continues 6 to 10 percent per year, let's say, and loans are made from
the trust fund at one-half of 1 percent per year, don't you think the
capital of the fund is going to be eroded rather rapidly and
dangerously ?




126
M r . B I R N B A U M . Senator, the amounts involved i n the trust f u n d to
which you refer are small when seen i n perspective. O f course the
exact amount w i l l depend on the proceeds f r o m sales of 25 m i l l i o n
ounces of gold, and the price of gold has varied considerably. The
trust f u n d w i l l not receive the f u l l sales proceeds, but only the net
amount that derives f r o m the excess of the sales price over the so-called
official price of sold. I n additioft, not all of this excess w i l l be used
for loans through 1Jhe trust f u n d ; part of the proceeds w i l l be directly
distributed to nonoil producing developing countries i n proportion to
their I M F quotas.
So I don't see that the trust f u n d constitutes a major impairment
of IMF capital.
Senator HEXMS. YOU don't see wisdom i n charging an interest rate
roughly equivalent, i f we can use that expression, to the inflation rate
then?
M r . B I R N B A U M . I would agree w i t h you that as a general principle
i t would be better to relate the interest rate to market rates. B u t i n this
instance we are dealing w i t h only the poorest nations of the world—
those I M F member countries w i t n per capita incomes of n6 more thaii
350 SDK's per annum. So obviously there is a special humanitarian
consideration i n attaching such a very low rate of interest, and extended terms of repayment, to trust fund loans. The arrangement also
represents a negotiated compromise, since all I M F member countries
w i l l also receive an additional 25 million ounces of gold which is being
distributed directly i n proportion to the size of their quotas i n the
Fund. This means that the rich countries w i l l tend to receive much
more gold than the poor countries.
I t is a very special arrangement.
I simply don't see i t as sufficiently important to divert us f r o m the
more important issues concerning the international monetary system
and the amendment of the I M F articles which are now before the
Congress.
M r . ALIBER. Senator, I think you made an ingenious suggestion.
I t h i n k i n a world of price stability trust f u n d loans ought to be 1.5
percent. They are charity loans.
I t h i n k trust fund loans ought to be 6.5 percent i f the rate of inflation
is 5 percent. I t is the same act of charity.
I t is, i f you want, doing the borrowers a good deed by forcing them
to t h i n k through and rationalize and choose more effectively on
their investment projects.
I am envious of you for having thought of i t first.
M r . SALANT. I am going to pass on this one.
I suspect that a lot more has gone into the determination of this
interest rate than I am aware of, and I am not going to express an
opinion about it.
M r . BRQWN. I f the United States is going to continue its role as a
great/world humanitarian, then I t h i n k the United States should,
i f i t is its disposition, lend money even at 1.5 percent.
I f , on the other hand, loans are to be tied to productive purposes
and are supposed to be noncharitable—then, as Senator Proxmire
mentioned, I believe interest rates, i f so specified for those kinds o f
loans, should perform, at the least its pricing function. However, the
trust f u n d was set up to make concessionary loans at charitable interest

rates—hardly i n I M F function.




127
M r . RoosA. I would take the view that I would not, i f I had been
negotiating, been i n favor of this provision.
But i t is a minor part of tiie total, and I , recogmzing that compromises are essential, feel this is one 1 can swallow witnout any great
difficulty.
I , i n general, feel interest rates should be placed at whatever the
market indicates and i f i t is not going to be a market-determined rate,
the degree o i subsidy has to be ciearly understood and the reasons for
the suusidy made ciear.
I think an mterest subsidy account perhaps makes sense i n two
ways, both the way i n which i t causes tlxose extending the credit and
subsidy to be careful of what they are doing, and also i n reminding
the recipients tnat tins is a subsidy out of line w i t h the normal patterns o i world payments.
But i t just seems to me that this is not a sticking point for passing
the legislation.
M r . B E N N E T T . M r . Chairman, I suspect the interest rates on the
regular loans of the I M F are more significant than those just from
tiie trust fund.
Most of the earlier comments here have referred to the trust fund.
On the regular drawings 1 think the present interest rates vary from
4 to 6 percent.
On the drawings under the oil facility, they go up to the 7- to 8percent range.
.Recently the U.S. administration, despite opposition, has led a
successful move to increase somewhat the interest rates i n the W o r l d
Bank.
I would see no harm i f this committee urged the Treasury to lean
i n the same direction i n the I M F .
Senator HELMS. Gentlemen, I thank you.
M r . Chairman, I thank you.
Senator PROXMIRE. I didn't realize they were 4 to 6 percent. That
is the most shocking revelation I have heard today.
I had a talk with M r . Yeo the other day on this and I am interested
to get his answer when he comes before us.
A f t e r all, that is at a lower interest rate than the Government is
paying for the money.
i t is obviously a direct subsidy. I f we make that kind of a loan, I
think we ought to go through the budgetary process.
Dr. Salant, you said that you analyzed this agreement from the
standpoint of three elements: the adjustment problem, the liquidity
problem, and the confidence problem.
You indicated this wouldn't solve any of your three problems yet
you came out for the legislation.
You did say i t might help a little as far as adjustment is concerned,
as far as liquidity and confidence, i t might help a little, but that i t
might not matter much, which would put you pretty much i n the
position of M r . Aliber.
M r . SALANT. I think i t is important and that the contribution relating to the adjustment problem is significant, although much remains
to be done i n the form of developing principles for Fund surveillance.
The reason I attach importance to the parts of the amendment that
relate to the adjustment problem is that i n a world of interdependent




128
countries i t is important not only to establish agreed codes of acceptable behavior but, beyond that, to develop the practice of observing
such codes. Violation of outdated rules during transition periods is
sometimes unavoidable, but i t would be very damaging i n the long r u n
to allow the flouting of agreed rules to become accented practice.
When one cannot avoid this by changing the realities, i t is better to
avoid i t by changing the rules to accord w i t h those realities. I n this
case the realities have changed, and failure to change the outdated
rules to accord w i t h them would entrench the practice of ignoring
agreed codes of behavior and contribute to making them meaningless.
That is why I think i t important to legitimize an existing practice, even
i f doing so has no other observable or short-run economic effect.
About the two other problems, I think you have correctly summarized my view. But I think the liquidity problem is always a
problem of the internal policies of the member countries. A n d so that
failure to solve the problem further at this time doesn't seem t o me
very serious.
Senator PROXMIRE. A t any rate, your analysis is that this is pretty
limited progress, a short step ?
M r . S A L A N T . I think i t is limited progress but I think our experience w i t h the system of flexible rates is very limited; we have a good
deal more to learn about how to operate it. I hope we w i l l be able to
acquire that experience and that after we have had the additional
experience there w i l l not be too much divergence of views as to what
conclusions should be drawn f r o m the experience.
B u t the fact is that views are very diverse now and there is a l i m i t to
what could be obtained by agreement.
Senator PROXMIRE. M r . Brown, you called for a firmer hand on the
I M F tiller. Y o u talk about how the hands are tied. Do you want to
untie those hands and put a firmer hand on the tiller? Wouldn't this
result i n some degree of surrender of our own sovereignty ? Wouldn't
i t mean an international policeman that would contradict much of
what I understand to be your philosophy ?
M r . B R O W N . Y O U put your finger right into the middle of the nuclear core. Yes, the U.S. policy has been that we don't want to surrender any control over our monetary—fiscal processes to an international monetary authority. That is why we have opposed M r . W h i t teveen's desperate cry for I M F international control.
Go back to Canada i n the 1950's, the floating exchange departure.
The I M F said nary a word. We can skip the fact that many countries
are full-fledged members of article 8, yet, they perpetuate exchange
controls.
There are certain loopholes that permit such things as years and
years of foreign exchange controls, and there are different ways to accomplish the same thing.
Y o u wonder what the I M F is doing, where is its strength. Take
the fact we stung the world and the I M F w i t h what we d i d on August*
15, 1971. We flaunted the I M F . We signed a solemn international
agreement and went back on our word.
Senator PROXMIRE. What I am t r y i n g to say is that you seem to
propose here a tougher, stronger position. F r o m a realistic standpoint,
you wouldn't expect other countries and certainly you wouldn't expect
the Senate or Congress to go along w i t h that k i n d of decision or f o r
that matter, i t would pirobably contradict the attitude of most people




129
i n this country. We have a struggle to t r y to get cooperation w i t h international organizations, and to t r y to get a tough policeman determining our monetary policies. I just think
M r . BROWN. Let's look at the alternatives. M y views now reflect the
knowledge I gained by reading Joseph Gold's analysis of the proposed
amendments. He is the general counsel of the International Monetary
Fund. I n what must have been a slip of the tongue, he said that the
proposed amendments are not a blueprint but are a collage.
O f course, he was absolutely 100 percent i n favor of the amendments.
Don't misunderstand his point of view from what I just said. But I
think i t was a slip of the tongue on his part. He did go on to point out
i n his most recent pamphlet that we are t r y i n g to give to the I M F
the kind of powers or pressures that theoretically they are supposed
to have had. This is a step toward international monetary control,
very subtly so as not to offend any legislature i n any major country
opposed to giving the I M F any kind of disciplinary roie.
The discipline given to the Fund is unspecified, unclear and I don't
know what the floating rate guidance principles w i l l be. I don't know
the specifics. I don't know what firm surveillance means. I think we
have to meet that test, or settle for international monetary anarchy i n
the absence of a universally accepted world currency, or I M F control
over international liquidity.
I think the world has reached the point where we have to have cont r o l over excessive international liquidity generated by deficit countries.
Senator PROXMIRE. Could I ask you, M r . Bennett, you seem to be a
rather firm champion of this proposal.
The National Advisory Council on International Monetary and
Financial Policy says on the first page of its special report on the b i l l
and I quote:
The agreement fulfills policy and objectives that the United States has pursued over several years of negotiations on international monetary reform.

Is that really true ? Don't the Jamaica agreements represent a glossing over of some of the major unsettled questions including the future
role of SDE's, the future role of gold, the dollar, specific principles
to pniard against competitive exchange rate practices? Isn't this
really an interim reform leaving fundamental disagreements for
later resolution ?
W i l l these limited achivements remove incentives for further reform
in the future?
M r . BENNETT. A S I said in my statement, I do not regard this as an
interim reform. I do not t h i n k you can write rules i n advance to apply,
for example, to the current Japanese situation. I t takes judgment in
the liq^ht of the current situation.
B u t the new agreement does provide an opportunity to apply surveillance to the Japanese situation without giving the Japanese the
excuse to say we are merely acquiring reserves to maintain our
exchange rate.
I t gives us a framework i n which surveillance can be conducted. As
far as the SDE, I agree the new agreement does nothing new about
the S D E as an asset. I t uses the S D E as a cocktail i n terms of which
obligations to and from the I M F are stated.




130
Senator PROXMIRE. Can I ask, M r . Aliber, you indicated this would
not have much economic effect but you approved it. A r e you concerned
that this might remove incentive for further reforms?
M r . A L I B E R . A few years ago we had an alderman i n Chicago who
said "Chicago ain't ready for reform yet." The analogy I think applies.
I t ' s too early, too premature to see what the system is going to be like.
We don't really know what the role of gold and the dollar w i l l be
i f the system stabilizes and i t is silly to make rules for the future.
O n the other hand, and I go back to my opening remarks, that the
means is the end. I t is almost as i f reform and participation i n the dialog, continuations of discussions is really the end process.
The rules, i f you want, are a vehicle, something to t a l k about so
we can continue communication w i t h other governments.
Senator PROXMIRE. One final question I would like to ask M r . Roosa.
H o w can you determine whether the one-third or more increase i n I M F
resources is the appropriate increase? It's been denied this is very
much or that this is inflationary, but I have the impression that the
international monetary system is pretty liquid right now.
A n d we have certainly suffered recently from world inflation. W h y
do we want to increase liquidity now ?
M r . ROOSA. I think i t is a problem of distribution rather than
amounts. I f the desired result i n terms of distribution of quotas, particularly i n the sense of targeting them for the less developed countries, i f that objective is going to be achieved, i t is just sort of an arithmetic byproduct of the Fund's arrangements that you can't accomplish that unless you do one of two things.
Either you increase all quotas i n a proportionate manner which is
what is proposed, or you rearrange quotas.
Now, the one rearrangement achieved here is i n raising the quota of
the O P E C countries. That provides access to more resources. B u t to
increase the quotas of the LDC's individually at this stage I t h i n k
would have been extremely difficult. Yet the principal reason f o r havi n g an increase is that on the one side there w i l l be the potential f o r
attracting the resources, particularly now of the wealthy O P E C countries, and on the other side, more resources can be made available to
those countries who need additional credit ( w i t h i n this overall adequate total framework) and who need i t on the conditional terms we
have been talking about here.
Senator PROXMIRE. That is an interesting argument because what
you are saying as I understand i t is that this may help at least somewhat meet the problem of the countries that have been h i t so hard by
the increase i n energy prices.
M r . ROOSA. Y e s .
Senator PROXMISE.

I f that is the case i n view of the fact that there
seems to be somewhat fading interest and support f o r the $25 billion
safety net Secretary Kissinger proposed, could i t be we no longer
have to worry about that possible obligation?
M r . ROOSA. I t may be. I t h i n k the safety net as you know is intended
really to take care of the great distortions that might occur
Senator PROXMIRE. We have gotten along pretty well without it.
M r . ROOSA. Yes; we did partly of course because the I M F f o r 2 years
had an oil facility on which the B r i t i s h could draw and bailed them
out i n part during the strains of the late 1974, early 1975.




131
But the purpose as I would describe i t i n what I have just said, is
really in effect to assure use of the fund as one means through which
additional OPEC resources flow to less developed countries that are
still t r y i n g to adjust to the great mutation in payments patterns that
followed the oil price change.
That I think is an important conduit product of raising the quotas.
Whether we w i l l continue to need something similar just for the developed countries, which is what the safety net does, I think is an open
question.
There are other ways of handling that including through the I M F ,
and I would suspect that the great advantage of the safety net lies in
the fact that it provides the stimulus for bringing all of those developed
countries together i n the International Energy Agency under the
aegis of the OECD.
I think we have to learn more from their own studies as to whether
there is a continuing need. I am just not in a position to judge.
Senator P R O X M I R E . Thank you very much. I want to thank all of
you gentlemen. I do want to tell Mr. Birnbaum that I can't resist saying
that I was interested in your suggestion that we reduce taxes on producers. Trouble is we don't know who is a producer. Farmers are producers ; I suppose some factory workers are, although I am not sure
i f they produce cigarettes and liquor that you should consider them
producers that should have lower taxes.
Whether bankers are producers and U.S. Senators are producers,
I am simply not sure. You w i l l certainly get debate on that.
Mr. B I R N B A U M . Not to mention Government civil servants. But I
have expressed a guiding principle applicable to workers and businesses, and the example I mentioned concerning the United Kingdom
illustrates what can happen i f the principle is neglected.
Senator P R O X M I R E . Thank you. Thank you, gentlemen, Mr. Yeo
Heavens, i t is a quarter to 2. W i l l you come up ? I apologize. I t is a
tough afternoon for us. That is why I have kept you so long.
STATEMENT OF EDWIN H. YEO I I I , UNDER SECRETARY FOR MONETARY AFFAIRS, DEPARTMENT OF THE TREASURY, ACCOMPANIED BY SAM Y. CROSS, EXECUTIVE DIRECTOR, INTERNATIONAL
MONETARY FUND, AND NANCY JACKLIN, COUNSEL
Mr. YEO. Good afternoon, Mr. Chairman.
I have w i t h me Sam Cross, Executive Director, International Monetary Fund, and our lawyer, Ms. Jacklin.
I have reduced my statement i n stages. Next to zero, I am at the
minimum.
I would like to submit my written statement for the record.
Senator P R O X M I R E . Fine.
Mr. YEO. We urge prompt and affirmative action on the legislation
to approve the amendment of the I M F articles of agreement and to
consent to an increase in our I M F quota. We feel this is the most
important legislation in the international finance field in many years.
I t represents international agreement on a new monetary system,
formulated at Rambouillet and Jamaica, following lengthy international negotiations in which the United States played a leading role;
and i t strengthens the I M F ' s ability to deal with the world's problems




132
of balance-of-payments financing and adjustment by a general
increase i n quotas.
The new monetary system is a more flexible, pragmatic, marketoriented system, replacing \ lie exchange rate r i g i d i t y and gold emphasis of the Bretton Woods system.
The new system discards the outmoded and unworkable elements
of Bretton Woods, but keeps and builds on the good features of that
system. Most importantly, i t retains the emphasis of the present I M F
articles on a liberal, open monetary and trading order; the commitment to cooperation and responsible international behavior i n monetary affairs; and the central role of a proven institution—the I M F —
as the heart and monitor of the system.
The new system, like the Bretton Woods par value system before
it, seeks to promote monetary stability. That is its objective, but by
a different approach. W h i l e Bretton Woods sought to impose monetary stability on the world by a structure of par values, the new
system recognizes that monetary stability is the result not of par
values or negotiations but of orderly underlying economic and financial conditions i n member countries.
Reflecting that change i n approach, the new system changes the
obligations of member countries. Under Bretton Woods, a fundamental obligation of each I M F member was to maintain a par value
for its currency. No other exchange practice—such as floating—was
recognized or tolerated. Under the Jamaica system, there is wide
latitude for a member country to allow its currency to float or follow
other arrangements of its choice. The fundamental obligations are
that countries must direct their policies toward fostering orderly
underlying economic and financial conditions, and that they must
avoid manipulating exchange rates to prevent balance-of-payments
adjustment or to gain unfair competitive advantage. The new svstem
thus concentrates on the real determinants of monetary stability—
stable economic and financial conditions—rather than on the exchange
rate consequences that were the main focus of Bretton Woods.
The new system is organically complete and workable. I t has the
flexibility to evolve as the world evolves, and i t can be expected to
function well i n the years ahead without maior revision. I t s adoption
has been widely accepted as a positive and beneficial move, a major
structural improvement for the world economy.
I t is acceptable to 128 different nations of widely differing interests, needs, and attitudes, i n a period of deferment and change i n
monetary doctrine.
I f i t does not satisfy every enthusiastic reformer—and any theorist
tends to measure a new system against his own subjective judgment
of the ideal monetary system—it does certainly constitute a workable
and pragmatic system that is a major improvement on the Bretton
Woods system as i t operated from i950 to 1970. This new system is
much better suited to dealing w i t h today's problems than any conceivable variation of the stable but adjustable par value svstem.
I think this summarizes the two major changes and I t h i n k in view
of the time that I would like simply to add, M r . Chairman, that what
you have before you we regard as vital. I t is the result of some lengthy
negotiations, but i t is not perfect.
Senator PROXMIRE. D i d you hear Senator Percy this morning?




133
M r . YEO. NO, sir; but I am familiar w i t h the amendment.
Senator P R O X M I R E . I understand the Treasury opposes that.
M r . YEO. We feel i t is unnecessary, M r . Chairman.
Senator P R O X M I R E . Supposing you had your choice of that amendment or putting this into the B u d g e t / W h i c h would you take?
[Laughter.]
Senator P R O X M I R E . That is a serious problem for us because this was
taken out of the budget a few years ago, 8 years ago, as you know.
A n d you are asking for our proceeding w i t h something that results
i n subsidized loans. A t least w i t h no information except at the discretion of the Treasury Department. So, i t is very hard, i t seems to
me, for us to have any oversight.
One way of getting oversight is to put i t in the budget. I t has to
come before us every year and we look at it.
Another way, a looser way, is to request information, be able to get
the appropriation information and the Treasury would be the judge of
what is appropriate.
M r . YEO. Well, M r . Chairman, the balance i n the question is i n the
direction of the operation of the Fund. We have no misgivings, no
reluctance whatsoever to provide Congress information, as i t desires.
Our recommendation would be against Senator Percy's amendment.
I cannot say to you that we would be necessarily i n an unworkable
situation i f the Congress adopted Senator Percy's amendment. I think
that we would certainly understand and wish to cooperate w i t h the
Senator's desire.
The thing we wish to avoid is the disclosure of information, or in
the minds of other countries, the threat of disclosure of their affairs.
The threat of disclosure of their affairs would reduce their willingness,
perhaps their ability to cooperate within the I M F framework.
I f I might say so, I think that Congress, as evidenced by this committee and this chairman, has complete oversight of conduct of international
Senator P R O X M I R E . Really effective oversight, as you know, does
depend on getting the facts and information. Senator Percy, I
thought, made a very powerful case fhis morning i n arguing that we
should be able to get information. He cited instances where they
weren't able to get i t and where that information was germane and
we needed it. You might want to review his testimony.
M r . YEO. I would be happy to.
Senator P R O X M I R E . He is, as you know, an extraordinarily competent Senator and very concerned about this.
The b i l l we have here contains a provision to amend the authority
of the Secretary of the Treasury to use the Exchange Stabilization
Fund as provided i n the Gold Reserve Act of 1934.
Instead of using the Exchange Stabilization Fund for the purpose
of stabilizing the exchange value of the dollar, the Secretary would
be empowered to use the b i l l as he may deem necessary, consistent w i t h
U.S. obligations i n the Monetary Fund. That change, which acknowledges we now live i n a world of floating exchange rates, raises an important question. For what purposes is the Exchange Stabilization
Fund being used now that the exchange rate for the dollar is floating ?
The I M F may adopt specific guidelines in the future for the exchange rate policies of members.

76-795 o - 76 - 9




34
A t present there are no formal I M F guidelines and Congress has
not adopted guidelines for those exchange market policies carried out
for the Exchange Stabilization Fund.
So, at a minimum, i t would seem appropriate for Congress to increase oversight w i t h respect to use of the Exchange Stabilization
F u n d by requiring an annual G A O audit of Fund operation, setting
an annual budget limitation even i f i t is not i n the budget i n the usual
form, on expenditures from the Fund. Would you agree w i t h that ?
M r . YEO. NO, sir. I think that the Exchange Stabilization F u n d i n
a floating system is more relevant than i n the par value system that
obtained i n the 1960's. The par value system i n the 1960's was characterized by massive intervention.
Senator PROXMIRE. I t is more relevant, but we know less how i t is
going to be used.
M r . YEO. I think that, i n terms of testimony that we have given before Congress on our intervention policy, we have indicated that i t
is our policy to intervene i n exchange markets to counter disorderly
market conditions. That probably is the most precise statement of
intervention policy that we have had i n the post-World W a r I I
period.
So, that I think the Congress is aware of what our intervention
policy is.
I think also that use of the Exchange Stabilization Furid under the
language adopted by the House, use of the Exchange Stabilization
F u n d would have to be congruent w i t h article I V . Article I V reinforces the concept of limited intervention to counter disorderly market
conditions.
I t might be an elliptical way to approach i t ; constraints on the use
are there.
Senator PROXMIRE. Let me follow up on article 4 effect. That also
imposes an obligation to members of the I M F , quote,
* * * to avoid manipulating exchange rates on the international monetary
system in order to prevent effective balance of payment adjustments or to gain
an unfair competitive advantage over other members.

W h a t is meant by manipulation ? Who w i l l decide whether a count r y is manipulating its exchange rates ?
W h a t I am concerned about is, for instance, Japan has been accused
of manipulating the value of the yen i n order to promote Japanese
exports. H o w w i l l the Fund go about determining i f a country violated this, and i f i t did so find, what would the Fund do about it?
M r . YEO. The item you mentioned under section 1 has to be coupled
w i t h the granting to the F u n d authority to maintain firm surveillance
which is i n section 3 of article I V . A combination of the two puts the
F u n d i n a position where i t w i l l , I believe, on a case-by-case basis,
examine the practices, as well as the motivations. As you read the
"thou shalt not manipulate" item i n section 1, you can see motivation,
as well as results, and what the Fund
Senator PROXMIRE. I t can examine and monitor but what can i t do'?
M r . YEO. The Fund can take three steps. One, i t can admonish i n
public—really, four steps. First, private consultations w i t h a member
country that the Fund feels is violating section 1 of article I V .
Senator PROXMIRE. I t can do that now.
M r . YEO. I t can do that now. This gives i t explicit authority i n article I V .




135
The second t h i n g the F u n d can do under that explicit authority is to
admonish a country that i t has become convinced is violating the section that you mentioned.
The t h i r d t h i n g i t can do is that i t can refuse to grant the use of
F u n d facilities to a violating country.
The f o u r t h t h i n g that i t can do is recommend to the membership
the expulsion of a country that has violated the item i n section 1 you
referred to.
I would like to add—
Senator P R O X M I R E . W h i c h of these are new powers that they do not
have now?
M r . YEO. The t h i n g that is new, M r . Chairman, is the explicit agreement on nonmanipulation of exchange rates contained i n section 1.
Second, the explicit coupling of that agreement i n the same article
w i t h granting the F u n d authority to maintain surveillance.
I would like to go on and point out that i f you want, as you have
very acceptably pointed out, i f you want supranational government, i f
you want an organization that is running the U.S. economy, running
the Belgium economy, then you can argue that i f that is the k i n d of
organization you desire, then you can argue for more teeth.
The second reduction is that you can argue the F u n d would have i n
its possession some sort of physical force. I t h i n k that that is really
rather farfetched.
The t h i r d reduction is that you believe there is a value i n cooperative behavior and participation i n cooperative institutions and that the
authority of these institutions reflected i n terms of the—of their
comments, i n terms of their judgments, and ultimately i n terms of this
institution's ability to eliminate access to its credit, you have to believe
in that type of organization.
I personally would not like to see our sovereignties substantially
limited and I believe i n the efficacy of that type of an approach.
As a practical matter I would submit that there is no other approach.
The F u n d has the tools that, as a practical matter, we can reasonably
expect i t to have.
Senator P R O X M I R E . I am going to ask you one more question, then
I w i l l submit ouestions f o r the record. I have to go to the floor.
M i l t o n Friedman once said that the function of the international
monetary system is the pseudo-generation of pseudo-crisis that can
only be resolved by upper level bureaucrats meeting i n exotic location around the world. W h y don't you ever have an international
monetary meeting i n Sandusky, Ohio. W h y does i t always have to be i n
some beautiful place i n Europe ?
M r . YEO. M r . Chairman, we are i n the process of w r i t i n g the Secretary's speech for the meeting coming up i n Manila i n early October.
I promise to recommend to h i m that he recommend that we have
i t i n a nonexotic place. Seriously, the places that I have been are a
blur of sleepless nights. A n d sometimes when I am i n private life, I
am ,«*oing to go back and see what they reallv look like. I know that
the hotels look like but that is the extent of i t , sir.
Senator P R O X M T R E . Thank vou very much. This has been—I know it's
been very difficult f o r you. We w i l l submit questions f o r the record,
(seep. 150).
[The complete statement of M r . Yeo, succeeded by additional material received f o r the record, follows:]




136
PREPARED S T A T E M E N T OF E D W I N H . Y E O I I I , U N D E R SECRETARY OP T H E T R E A S U R *
FOR M O N E T A R Y A F F A I R S

Mr. Chairman and Members of the Subcommittee: I urge prompt and affirmative action on the legislation to approve amendment of the I M F Articles of
Agreement and to consent to an increase in our I M F quota.
This is the most important legislation in the international finance field in
many years. I t represents international agreement on a new monetary system,
formulated at Rambouillet and Jamaica, following lengthy international negotiations in which the United States played a leading role; and it strengthens
the IMF's ability to deal with the world's problems of balance of payments
financing and adjustment by a general increase in quotas.
The new monetary system is a more flexible, pragmatic, market-oriented system,
replacing the exchange rate rigidity and gold emphasis of the Bretton Woods system which broke down five years ago.
The new system discards the outmoded and unworkable elements of Bretton
Woods, but keeps and builds on the good features of that system. Most importantly, it retains the emphasis of the present I M F Articles on a liberal, open
monetary and trading order; the commitment to cooperation and responsible
international behavior in monetary affairs; and the central role of a proven
institution—the IMF—as the heart and monitor of the system.
The new system, like the Bretton Woods par value system before it, seeks to
promote monetary stability, but by a different approach. While Bretton Woods
sought to impose monetary stability on the world by a structure of par values,
the new system recognizes that monetary stability is the result not of par values
but of orderly underlying economic and financial conditions in member countries.
Reflecting that change in approach, the new system changes the obligations of
member countries. Under Bretton Woods, a fundamental obligation of each
I M F member was to maintain a par value for its currency. No other exchange
practice—such as floating—was recognized or tolerated. Under the Jamaica
system, there is wide latitude for a member country to allow its currency to
float or follow other exchange arrangements of its choice. The fundamental
obligations are that countries must direct their policies toward fostering orderly
underlying economic and financial conditions, and that they must avoid manipulating exchange rates to prevent balance of payments adjustment or to gain unfair
competitive advantage. The new sytem thus concentrates on the real determinants
of monetary stability—stable economic and financial conditions—rather than
on the exchange rate consequences that were the main focus of Bretton Woods.
The new system is organically complete and workable. I t has the flexibility
to evolve as the world evolves, and it can be expected to function well in the
years ahead without major revision. Its adoption has been widely accepted as
a positive and beneficial move, a major structural improvement for the world
economy. I t is acceptable to 128 different nations of widely differing interests,
needs, and attitudes, in a period of ferment and change in monetary doctrine.
I f it does not satisfy every enthusiastic reformer—and any theorist tends to
measure a new system against his own subjective judgment of the ideal
monetary system—it does certainly constitute a workable and pragmatic system
that is a major improvement on the Bretton Woods system as it operated from
1950 to 1970. This new system is much better suited to dealing with today's
problems than any conceivable variation of the stable but adjustable par value
system.
The stable but adjustable par value system of Bretton Woods was in retrospect
a "fair weather system." I t worked fairly well in the late 1950's and early 1960's
when we experienced low rates of inflation, had no massive dependence on
expensive OPEC oil, faced only moderate capital flows, and enjoyed a long
period of world prosperity.
The new system is a "system for all seasons." I t recognizes that we can't
always expect the pleasant economic environment of that earlier period. I t
recognizes that nations will not always be willing to follow the monetary and
other macro-economic policies needed to keep prices and incomes in close harmony with their neighbors. I t recognizes there will be differing propensities to
inflate—in Europe alone, price increases in the past year varied from 5 percent
in Germany to 17 percent in Italy and 33 percent in Iceland. I t recognizes that
there has been a revolutionary change in exchange markets; that nations cannot
afford to risk free speculation that results when a par value becomes unrealistic;
that a nation cannot maintain in the face of market pressures an exchange rate
that does not reflect its competitive position. And it recognizes that different
exchange policies may be preferred by and appropriate for different countries.




137
No single prescription necessarily meets the needs of all nations large or small,
diversified or one-crop, manufacturing or primary producers. The Jamaica
amendment makes it legal for countries to follow exchange practices over a wide
spectrum from individual free floating, through managed floating, group floating
and trotting pegs, all the way to pegged rates 'that are adjusted by infrequent
changes.
While the new system will be a tolerant system, as I M F Managing Director
Witteveen has put it "freedom of choice is not freedom of behavior." The Fund
is empowered to exercise broad surveillance on all types of exchange practices
of members, to promite international cooperation and avoid unfair competition
or exchange policies that prevent international adjustment.
The I M F is in a very real sense the focal point, the core of the system. Members are obliged to provide the Fund with the information necessary for intelligent surveillance of their exchange rate policies. I n addition, the Fund
is called upon to adopt "specific principles" for the guidance of members with
respect to those exchange rate policies to assure that manipulative practices
are avoided. I n the Bretton Woods system the Fund's attention was more likely
to be directed toward a member in times of crisis, and more narrowly focused
toward exchange markets. By contrast, under the new system, Fund consultations with members are likely to be more continuous, more broadly based, more
concerned with the real international impact of a country's actions, and directed
to all countries, not just those in deficit.
Fund surveillance and oversight of members' exchange rate policies does not
mean that the Fund can determine the policies of sovereign countries. This
would be totally impractical, and unacceptable to the United States and all
Fund members. But one member's behavior should not be at the expense of other
members' well being. Within that context, the Fund can develop general principles interacting with a type of common law based on application of these
principles to individual cases, aimed at assuring that members' exchange policies promote stability and adjustment and are not designed to gain an unfair
competitive advantage.
I n developing specific principles, the Fund will need to proceed cautiously.
Such principles must have very broad acceptance by Fund members. Their development cannot be forced, but they can be expected to emerge over time in
the light of general and specific consultations with members. In this way, the
general principles of acceptable behavior will evolve, grounded 011 the agreed
objectives and obligations of the new system.
Detailed codes of behavior are not set forth in the amended Articles. Nor
should they be. The original Articles drafted in 1944 contained specific rules and
regulations—far too many of which became obsolete and unworkable as time
passed and conditions changed. The Articles is a constitution, not a contract.
I t should not prescribe detailed rules as these must take account of each individual case and circumstance—particularly in an institution of such diverse
country membership that the largest member is 60,000 times as big as the
smallest in terms of GNP. Moreover, the amended I M F constitution is a flexible
one, permitting a modification to a different kind of monetary system if conditions change and a large consensus favors such a move, and if detailed rules
were to be included there would have to be rules for more than one system.
The Fund does have sanctions which can be applied when critical provisions
of its Articles are violated—most importantly it can deny an offending member
access to its resources or it can exclude it from membership. But the I M F relies
more on its moral force, as voice of the international community, and that carries considerable weight.
Some reformers have expressed concern that the new system does not establish formal I M F control over the level and growth of international reserves.
This matter was discussed at great length in the reform negotiations. But no
group, neither the developing countries, the oil exporters, nor the industrial
nations showed any willingness to accept the restrictions on their ability to borrow, lend, or acquire currencies that would be necessary to establish quantitative limits on reserves. There is in addition considerable doubt in many quarters that placing such power of decision in an international body would be either
effective or desirable. At the very least, the time for such a move would appear
to be well in the future, not now.
A second and related major change in approach in the new system is the shift
away from gold. Under the Bretton Woods system, gold, with its supply limitations, speculative pressures, and competing industrial demands, proved a capricious and volatile asset, unsuitable as a basis for the international monetary




138
system—just as it had earlier proved unsuitable as a basis for the U.S. and
other domestic monetary systems. I n recognition of these inadequacies, the new
system promotes a further reduction in gold's monetary role, by eliminating
gold's legal position as the central asset and numerarie of the monetary system,
by eliminating the required use of gold in I M F transactions, and by empowering
the I M F to dispose of its remaining gold holdings.
With dismantling of many I M F rules and restraints on official gold transactions, important side arrangements have been agreed among the Group of Ten—
the major gold holding nations—to assure that gold does not re-emerge as a
major interntaional monetary asset. This understanding, which is not part of
the amended Articles, but is consistent with and supportive of the policies of
the amended Articles, provides that participating nations: will not act to peg
the price of. gold; will agree not to increase the total stock of monetary gold;
will respect any further conditions governing gold trading to which their
central banks may agree; and will report regularly on gold sales and purchases.
The arrangement took effect February 1, 1976, and will be reviewed after two
years, and then continued, modified, or terminated. I t is in our view an important
and necessary safeguard during this transitional period, although I am firmly
convinced that in any case gold's role in the monetary system will continue progressively to decline.
I n parallel with phasing down gold's monetary role, the new system provides
an expanded role for the Special Drawing Right, and modifies certain of the rules
governing that new asset.
Under the amended Articles, the link between the SDR and gold is severed.
The SDR replaces gold as the common denominator of the system, and is the unit
for measuring I M F rights and obligations. The SDR is expected to take on an
increasingly important role, not only as a unit of account used in measurements,
but also as as asset used in transactions. With respect to its asset use, there is an
obligation on members to collaborate with the Fund toward the objective of making the SDR the principal reserve asset of the international monetary system.
Also the SDR takes over from gold the preferred statue as asset to be received
by the Fund in payment of charges, in meeting repurchase obligations, and to be
accepted by members in exchange for currencies replenished by the Fund.
A number of technical steps have been taken to improve the SDK's quality and
usability so that it may better fulfill its purposes. Thus countries will have
greater freedom to enter into SDR transactions with each other on a voluntary
basis; the possible uses have been expanded; and the Fund may broaden the
categories of holders—though not beyond official entities—and the operations in
which they engage. Also, the decisions for altering certain poliices governing
SDRs are made easier—such as the terms and conditions governing approved
transactions, and the rules that require countries to "reconstitute" or buy back
after a certain period some of the SDRs they have spent.
At the same time these rules governing use of the SDRs are being eased, important safeguards have been retained which help assure that the SDR will
remain a widely accepted and valued asset. Thus, the limit on members' obligation to accept SDR is retained, and I M F quotas remain the basis for new SDR
allocations.
Both of the two main improvements in the monetary system—the move to more
flexible exchange rate arrangements and the move to reduce gold's monetary
role—are of critical importance to the United States. Under Bretton Woods, it
was the dollar that was pinned down at the center of the system, and our exchange rate that could not adjust adequately in response to market forces—with
the result, in the late 1960's and early 1970's, not only of increased debts, but
also of loss of jobs, productive capacity and transfer of our industry abroad.
The new monetary system embodied in this legislation provides important safeguards against such an adverse position. This is a matter of critical importance
to the strength of our economy and the prosperity of our citizens.
The amended Articles will terminate for I M F purposes existing par values for
all I M F members. The legislation before you would repeal the par value of the
dollar. Prior Congressional approval would be required to authorize any future
establishment of a par value for the dollar in the Fund, or to authorize any
change in the par value if one were established. The standard for the dollar of
$42.22 per fine ounce of gold in present legislation would be retained solely with
respect to gold certificates held by the Federal Reserve System—the only domestic
purpose for which a par value in terms of gold is needed. These gold certificates
are being retired by the Treasury as its gold holding are sold.




139
I have confined my remarks to the major points. Numerous other changes
being made to improve the operation of the I M F and the monetary system are
explained in detail in material we have submitted to the Congress.
This legislation has been approved in the House by a large majority, and
favorably reported by unanimous vote of the Senate Foreign Relations Committee. I t is urgent that the Congress move promptly and affirmatively to complete legislative action. Since the breakdown of Bretton Woods five years ago,
international exchange arrangements have of necessity been operating outside
the law. We must restore the structure of an equitable, workable, lawful system. The United States has played a prominent role in bringing about acceptance
of the new arrangements, and our acceptance of them will encourage others to
follow so that we can implement these proposals with a minimum of delay.

THE

REFORMED

INTERNATIONAL

MONETARY

SYSTEM

(By Edward M. Bernstein, President of EMB (Ltd.) Research Economists)
PROCESS

OF

REFORM

By the mid-1960s it had become apparent from the large and persistent balance
of payments deficits of the United States that the international monetary system
established at Bretton Woods was no longer functioning properly. One defect was
that the charter of the International Monetary Fund made no provision for an
adequate growth of reserves to meet the needs of an expanding world economy,
although it did provide for recurrent increases in the resources available for
reserve credit through general increases in quotas. Because of this defect, it was
said, the growth of reserves had to be met by accumulating dollars acquired
from the U.S. payments deficit. The problem this created was aggravated by a
growing preference for gold in the reserves of countries that had already accumulated substantial amounts of dollars. And as the monetary gold stock increased at an average annual rate of only one-half of one percent from 1950 to
1965, this preference could be satisfied only by depleting the gold reserves of the
United States. To meet this problem the Fund Agreement was amended in 1969
to give the Fund authority to create a new reserve asset, Special Drawing
Rights. Three issues of the new reserve asset were made at the beginning of
each year from 1970 to 1972, aggregating about SDR 9.3 billion.
The continuation of the U.S. payments deficit, and its increase to $10 billion in
1970 and $30 billion in 1971 on an official reserve basis, showed that the defects
in the monetary system were much more fundamental than the inadequate
growth of reserves. I n the view of the United States, the basic difficulty was the
failure of countries to make prompt changes in par values to reflect changes in
their relative international economic position. Beyond that, the asymmetrical nature of the adjustment process placed the responsibility for restoring the balance
of payments primarily, if not entirely, on deficit countries. After the United
States terminated the gold convertibility of the dollar in August 1971 and allowed the dollar to float, it became clear that fundamental changes had to be
made in the Bretton Woods system, and that these would have to include greater
flexibility of exchange rates, symmetrical responsibility of surplus and deficit
countries for balance of payments adjustment, and consequential changes in the
obligation to maintain convertibility and in related matters, such as intervention in exchange markets.
I n June 1972, the Board of Governors of the Fund appointed a Committee of
20 to advise and report on a comprehensive reform of the international monetary
system. The Committee of 20 had the assistance of a very able group of deputies
to direct its studies. Two years later, the Committee of 20 presented its final
report with an Outline of Reform and accompanying Annexes on a number of
technical questions prepared by the chairman and vice-chairman of the deputies.
The Committee of 20 recognized that because of inflation, the energy situation
and generally unsettled conditions, "it will be some time before a reformed system can be finally agreed and fully implemented." I t therefore proposed that a
number of steps be taken to begin an evolutionary process of reform. These included immediate action to establish a facility in the Fund to assist members
in meeting the impact of the increase in oil costs, to prepare guidelines for the
management of floating exchange rates, and to devise a method of valuing the
SDR based on a basket of currencies. The action program also proposed the




140
appointment of an Interim Committee of the Board of Governors with an advisory role pending amendment of the Fund Agreement to create a Council of
Governors with decision-making powers.
The Interim Committee was established by the Board of Governors in September 1974. This Committee held five meetings between October 1974 and January 1976 at which it considered the problems that would have to be dealt with
in a reform of the monetary system and other matters of high policy of the
Fund. Because the Interim Committee consisted of ministers of finance, it could
reach agreement on the unsettled questions and make recommendations for resolving them that had the support of their Governments. At its fifth meeting in
Kingston, Jamaica, January 7-8, the Interim Committee completed agreement on
virtually all of the outstanding issues. Its recommendations on reform and on
matters of high policy were transmitted to the Executive Directors who put into
effect those that could be implemened under the existing powers of the Fund and
prepared a comprehensive amendment for those requiring basic changes in the
Fund Agreement. A number of questions on reform remain unsettled and they
will continue to be studied by the Interim Committee and the Executive Directors, but without delaying the presentation of the comprehensive amendment
for approval by member Governments, a process that may take about 18 months
before it comes into effect.
At the press conference following the Jamaica meeting, Mr. H. Johannes Witteveen, the managing director of the Fund, said: "[We] can say that we have now
come to the end or almost to the end of a long process in which we have run
through all of the Articles [of Agreement of the Fund] very thoroughly, and I
think we have achieved a complete updating of the Articles of Agreement in
the present situation." The comprehensive amendment is the result of four years
of cooperative effort of the Committee of 20, the Interim Committee, the Executive Directors and staff of the Fund, and of the officials and technicians of many
member countries. The delay in reaching an agreement on monetary reform has
not been without benefit. I t has enabled the reform to take into account how
the world economy and the monetary system have actually worked in a period
of great uncertainty. I t has given Governments time to reach agreement on such
complex issues as the exchange regime, the monetary role of gold, and the
special payments problems of developing countries.
T H E E X C H A N G E BATE BEGIME

One of the major questions on which it was very difficult to secure agreement
was the exchange rate regime. The Outline of Reform stated categorically: "The
exchange rate mechanism will remain based on stable but adjustable parvalues . . . [and] countries should, whether in surplus or deficit, make appropriate par value changes promptly." Greater flexibility in exchange rates would
be provided through wider margins and simplified procedures for making small
changes in par value. Countries could adopt floating rates in particular situations, subject to Fund authorization, surveillance and review. This preference
for a norm of par values with greater flexibility was gradually modified in the
discussions of the Interim Committee. While France held that the monetary
system should be based on par values, the United States held that this depended
on prior attainment of stable monetary conditions and that countries should
be allowed to have floating rates.
The failure of the second devaluation of the dollar in February 1973 showed
that it was not possible to restore a system of fixed par values under prevailing conditions. That is why the present mixed system evolved. I t combines a
high degree of exchange stability for the currencies of the European common
float (the snake) in terms of each other, a floating dollar to which other currencies were attached, and independent floating of other major currencies. From
the point of view of the exchange market the present system has worked well.
I t has avoided exchange crises involving the dollar of the type that occurred in
1971 and 1973. I t has balanced the supply of and demand for doMars in the exchange market, although not without large fluctuations in the dollar exchange
rates for the snake. I n has had no obviously adverse effect on world trade, apart
from some problems affecting exports and imports of manufactured goods. These
are positive achievements in a very unbalanced world.
As long as the world is confronted by persistent inflation and large imbalances
in international payments, there is no alternative to a system of fluctuating
exchange rates combined with broader areas of exchange stability. The objectionable aspect of the present system is not that exchange rates fluctuate, but




141
that the dollar rates for the snake fluctuate too much. I n the past three years,
the dollar rates for these currencies have risen and fallen alternately by 10 to
20 per cent over periods of three or four months. Such large fluctuations over
such short periods cannot reflect changes in underlying economic conditions—»
differences in relative inflation or in interest rates. They are primarily due to
speculative capital flows in anticipation of changes in exchange rates. The
excessive fluctuations of the dollar rates for the snake distort the pattern of
trade in manufactured goods. When the dollar is at a peak, the exchange rate
imposes an implicit tax on exports and a bounty on imports. When the dollar
is at its nadir, the tax and bounty effects are reversed. Moreover, these fluctuations affect the competitive position of trade in manufactured goods in other
countries—not only for the United States and Europe, but also for Japan and
Canada as well as the developing countries. With such large and erratic fluctuations, the exchange rate cannot perform its fundamental function of bringing
about a pattern of trade based on comparative costs and a flow of capital based
on comparative profit and interest rates.
The difference in views on the exchange rate regime was finally resolved at a
meeting of the heads of States and Governments of the six largest industrial
countries at Rambouillet in November 1975 at which they agreed on the need to
work for greater monetary stability. I n deference to the United States, the
communique stated that "this involves efforts to restore greater stability in underlying economic and financial conditions in the world economy." I n deference to
France, it stated that "at the same time, our monetary authorities will act to
counter disorderly market conditions, or erratic fluctuations, in exchange rates."
At a meeting of the Group of Ten in December 1975, the ministers of finance and
central bank governors discussed these proposals to intensify consultation on
exchange rate movements and underlying factors affecting monetary stability and
they noted that their central banks were in the process of deepening and broadening consultations for the purpose of countering erratic fluctuations in exchange
rates. This understanding cleared the way for agreement at the meeting of the
Interim Committee in Jamaica to amend Article I V of the Fund statutes on the
exchange rate regime.
Under the amended Article, members will still have a general obligation to
collaborate with the Fund and other members to assure orderly exchange conditions and to promote a stable system of exchange rates. The emphasis, however,
is shifted to doing this through economic and financial policies that foster orderly
economic growth with reasonable price stability. The specific exchange arrangements a member may follow are any of those that prevail today. At present, 12
members of the Fund maintain the exchange rates for their currencies in terms
of the value of a unit of SDRs. Eight members in the snake maintain exchange
rates for their currencies in terms of each other within 2*4 of the ratios of their
central rates. The United States and a number of other members have freely
fluctuating exchange rates for their currencies. Most members of the Fund, however, link their exchange rates to another major currency, with more than 50
linked to the dollar and about 20 linked to sterling or the French franc.
The new exchange regime gives equal status to all present exchange arrangements, although it would be possible to reduce the diversity in the future. The
amended Article states: "To accord with the development of the international
monetary system, the Fund by an 85 percent majority of the total voting power,
may make provision for general exchange arrangements without limiting the
right of members to have exchange arrangements of their choice consistent with
the purposes of the Fund." More specifically, the Fund may determine that international economic conditions permit the introduction of a widespread system of
exchange arrangements based on stable but adjustable par values. To do this,
however, the Fund must first determine that underlying conditions are favorable,
taking into account price movements (inflation) and rates of expansion in the
economies of members (cyclical conditions and rates of growth). As further conditions for establishing such a qualified par value system, the Fund would have
to be satisfied that there are adequate sources of liquidity and that arrangements
are made for prompt and symmetrical action by surplus and deficit countries in
adjusting their balance of payments, as well as arrangements for intervention
and tb^ treatment of imbalances, which may mean modes of settlement and
convertibility.
The procedure for establishing par values is set out in a separate schedule.
The Fund must notify members that par values may be established in terms of
the SDR or another common denominator it prescribes, but not gold or a cur-




142
rency. A member may then propose a par value which will come into effect if the
Fund concurs or does not object within a reasonable time. A member that has a
par value will be obligated to maintain exchange rates for other currencies with
par values within 4% percent of the cross-rate parities. A change in an established par value may be made only on the proposal of a member and only to
correct or prevent the emergence of a fundamental disequilibrium. A member
may terminate the par value of its currency by notifying the Fund. A member
that does not intend to establish a par value will have to consult with the Fund
to ensure that its exchange arrangements are adequate to fulfill its obligations
on maintaining orderly exchange conditions and promoting exchange stability.
I f the Fund does not concur in a proposal for a par value or a change in a par
value, or if the par value is terminated, a member will be subject to the obligation to consult with the Fund and fulfill the same obligations as a member
that does not establish a par value.
I t may seem that the amended Article on the exchange regime has no practical
significance because it does no more than legalize the existing exchange system
and recognize the need for greater exchange rate flexibility. Even that is of
considerable importance, because it corrects a serious omission in the Bretton
Woods Agreement. As it has become clear in the past few years that the world
economy cannot be adapted to the system of fixed parities, it is necessary instead
to adapt the exchange system to the realities of the world economy. I n practice,
the amended Article may give the Fund considerable influence on the exchange
rate policies of its members. After all, there must be more to the general obligation to collaborate with the Fund and other members in assuring orderly exchange
conditions and promoting stable exchange rates than to foster orderly financial
and economic conditions.
The amended Article is directed as much to countries with fluctuating exchange
rates as to those with par values. The Fund is required to oversee the international monetary system in order to ensure its effective operation and the
compliance of each member with its obligations on exchange rates. To fulfill this
function, the amendment states that "the Fund shall exercise firm surveillance
over the exchange rate policies of members, and shall adopt specific principles
for the guidance of all members with respect to those policies." Under this provision, the Fund could adopt guidelines on fluctuating rates that would place
responsibility on members to avoid erratic and excessive fluctuations and to
moderate such fluctuations when they are not caused by changes in underlying
economic conditions. Such a responsibility cannot be one-sided, and intervention
to prevent erratic and excessive fluctuations would have to be made only after
consultation with the Fund and in cooperation with other members whose currencies are involved.
GOLD A N D SDBS

The Outline of Reform stated that "the SDR will become the principal reserve
asset and the role of gold and reserve currencies will be reduced" The difficulty
in securing agreement on gold was the difference in the views of the United States
and France, mainly on the right of monetary authorities to engage in gold transactions at market-related prices. I n the course of its discussions, particularly at the
fourth meeting on August 31,1975, the Interim Committee agreed on abolition of
an official price of gold and elimination of the obligation to use gold in transactions
with the Fund and of the Fund's authority to accept gold. I t also agreed on the
sale of one-sixth (25 million ounces) of the gold holdings of the Fund for the
benefit of the developing countries and the sale of an equal amount to members
at the official price of 35 SDRs an ounce (restitution). The interim Committee had
previously agreed that national monetary authorities should be free to enter into
gold transactions under specific arrangements that would ensure that the monetary role of gold would be gradually reduced. At its August meeting it noted that
the Group of Ten had entered into such arrangements.
The comprehensive amendment will eliminate entirely the numerous provisions
on gold in the Fund Agreement. The official price of gold will be abolished. Payments in gold to the. Fund by its members are now required for subscriptions,
repurchases, and charges. These will be replaced by payment in SDRs or in currencies. The general increase in quotas that has just been agreed will not come
into effect until the provision for part payment of subscriptions in gold has been
amended. Article I V has dropped any reference to countries that buy and sell
gold freely for international settlements, and the alternative form of convertibility
in gold in Article V I I I will be changed. The sale of gold for the benefit tof developing countries and the restitution of gold to members at the official price will be




143
made under the existing powers of the Fund. The amended Agreement, however,
will contain enabling provisions under which the Fund could use the remaining
100 million ounces of its gold in restitution to members at the present official price
or in sales to the market at prevailing prices, with the profits used to augment its
general resources or to provide .balance of payments assistance on special terms
to developing countries in difficult circumstances. Decisions on the use of profits
in the regular transactions of the Fund will require a 70 per cent majority of the
total voting power and on the use of profits in other operations and transactions,
presumably for the benefit of developing countries, will require an 85 per cent
majority.
The abolition of an official price of gold and the termination of gold transactions between the Fund and its members are major steps in reducing the monetary
role of gold. The disposal of 50 million ounces in restitution of gold to members and
in the sale of gold for the benefit of developing countries will remove one-third
of the Fund's holdings and replace them with usable currencies and SDRs. That
is a further step in eliminating gold from the Fund. On the other hand, it has been
said that the restitution of gold to members will increase its importance in their
reserves and that the arrangements of the Group of Ten, with the acquiescence of
the Fund, will facilitate a resumption of its use in international settlements.
Under these arrangements, to which other countries may adhere, the monetary
authorities of the Group of Ten will be allowed to buy and sell gold at marketrelated prices, provided this does not involve pegging the price of gold or increasing the total stock of monetary gold now held by the Fund and the Group of Ten.
The holding of gold reserves and their use in international settlements are the
essential features of the monetary role of gold.
I n spite of the arrangements of the Group of Ten, it is very doubtful whether
gold will be much used in international settlements. Some central banks may be
willing to sell gold when confronted with serious payments probems if they
have alreay run down their reserves of foreign exchange and SDRs and have
difficulty in securing further reserve credit. The critical question about the use
of gold in international settlements is whether central banks will be ready buyers
of gold at market-related prices. Central banks are understandably reluctant to
acquire assets whose value in their own currencies is subject to sharp fluctuation
and that applies even more to go^d than to foreign exchange. Moreover, unless
the United States and other countries are willing to buy gold at market-related
prices, central banks may find that they acquired a reserve asset when they had
a surplus which they would be unable to use to settle a deficit. Some gold sales by
central banks might be arranged under repurchase agreements, but that would
in fact be a loan on gold collateral rather than a true sale of gold. I f countries
do sell gold to meet balance of payments deficits, it would probably be in moderate
amount in the free market and unless matched by purchases by other monetary
authorities, say, to restore gold previously sold, it would result in a gradual
reduction of the monetary stock of gold.
I f termination of the monetary role of gold is conceived as requiring its elimination from the reserves of members of the Fund, then there is no prospect of
achieving this at any time in the foreseeable future. Apart from the fact that
gold retains its ancient mystique, so that some central banks like to show gold
holdings in their balance sheets, there is the problem of what to do with the
present stock of about 1 billion ounces held by countries outside the Communist
group. Such an amount cannot be sold in the free market, even gradually, without
causing a drastic fall in price, which central banks would find very disturbing.
Besides, there is no asset that central banks w^ant to acquire in place of gold.
When silver was demonetized, central banks hastened to sell most of their holdings in order to buy gold. They are certainly not going to dispose of a sizable
part of their gold holdings under present conditions. They may sell minor amounts
in the free market from time to time to acquire needed foreign exchange or to
meet domestic industrial demand. As for the great bulk of their gold, it will
remain at the bottom of the reserve pile, part of the national patrimony but not
used except in times of great stress approaching a national emergency.
I t has been suggested that the simplest way to eliminate gold from reserves
would be by establishing a substitution account in the Fund through which members would be able to exchange a part or all of their gold holdings, for SDRs
issued bv the Fund for this purpose. Obviously, no country would exchange its gold
for SDRs at the official price. Nor would any country be willing to make such an
exchange at a market-related price unless it became absolutely necessary to sell
gold to meet a payments deficit and it found an exchange for SDRs at the current




144
free market price of gold a convenient method of doing this. That would require
an open-end substitution account rather than a once-for-all exchange. The fact
is that SDRs have not yet acquired the degree of international acceptance that
would induce countries to hold them instead of gold or even instead of currencies. At its Jamaica meeting, the Interim Committee asked the Executive Directors
of the Fund to continue their consideration of a substitution account for gold, but
without delaying completion of their comprehensive amendment. As this indicates,
there is no possibility of creating a substitution account for gold.
The future monetary role of gold will not be determined by rules designed to
insulate the monetary system from gold. That will certainly make gold a less
usable reserve asset, but even in this regard the gold policy of the United States
and other large trading countries is of greater practical importance. The monetary role of gold will be determined by developments in the international monetary system. Gold is very unlikely to resume its previous role as the primary
reserve asset into which other reserves, such as dollars, are convertible. But if
the international monetary system evolves toward a widespread use of par values,
and that does depend on achieving a high degree of price stability, a practical
method of using gold in international settlements in conjunction with other
reserve assets may be found, as through a Reserve Settlement Account. Although
that may seem contrary to all recent developments, the policies of Governments
are not immutable. On July 3, 1933, President Roosevelt sent a message to the
World Economic Conference in London in which he said:
" I would regard it as a catastrophe amounting to a world tragedy if the great
conference of nations, called to bring about a more real and permanent financial
stability and a greater prosperity to the masses of all nations, should, in advance
of any serious effort to consider these broader problems, allow itself to be diverted
by the proposal of a purely artificial and temporary experiment affecting the
monetary exchange of a few nations only . . . Let me be frank in saying that
the United States seeks the kind of dollar which a generation hence will have
the same purchasing power and debt-paying power as the dollar value we hope
to attain in the near future. That objective means more to the good of other
nations than a fixed ratio for a month or two in terms of the pound or the franc."
Eight months later, the United States adopted the Gold Reserve Act of 1934
which fixed the monetary price of gold at $35 an ounce.
The Outline of Reform stated that the SDR would become the numeraire in
which par values will be expressed. The first step in this direction was taken on
July 1, 1974 when the definition of the value of a unit of SDRs was changed
from 1/35 of an ounce of gold to specified amounts of a basket of 16 currencies.
Such a change had become essential for the operations of the Fund after the
sharp rise in the free market price of gold. I n fact, Annex 9 of the Outline of
Reform discussed various methods of valuing the SDR, including the one that
was adopted. The new valuation method has provided a convenient currency base
for countries that want to avoid the wide fluctuations in the exchange rates for
the dollar relative to the snake. As the dollar was one-third of the initial value
of the SDR and as a few other currencies in the SDR basket have changed relatively little in terms of the dollar, the value of the SDR in dollars has fluctuated
within a moderate range of 3.5 per cent below and 4.5 per cent above its initial
value. The D-mark value of the SDR has fluctuated in a slightly wider range
between 2.7 per cent below and 6.3 per cent above its initial value. The amendment to Article I V will make the SDR the common denominator of par values
unless some other numeraire is adopted. There would be some technical problem
in using the SDR as now valued for the common denominator in a widespread
system of par values, particularly for the currencies in the basket, but that could
be easily adjusted.
The statement that the SDR will become the principal reserve asset is only a
hope for the distant future. The importance of SDRs in the aggregate of reserves
will grow gradually as further issues are made, particularly if the stock of
monetary gold is decreased and foreign exchange reserves increase relatively
little. The use of SDRs in international settlements, however, will certainly
become much greater if the SDR acquires more of the characteristics of a freely
usable reserve asset. The amended Articles will authorize the Fund to review
the rules for reconstitution at any time and to change these rules by a 70 per
cent majority of the total voting power. Countries will be free to deal in SDRs
without designation by the Fund and without showing a need to use them in
settlement of deficits. The Fund will also have broader authority to designate
international and regional institutions eligible to hold SDRs and deal in them.
I n short, with the amendment, countries will be able to use SDRs with complete




145
freedom as a true reserve asset, in much the same way as they used gold reserves
in the past and use foreign exchange reserves now. The improvement in the
reserve character of the SDR will have to be followed by a resumption of their
issues if they are to be much more widely used in international settlements.
RESOURCES FOR DEVELOPING COUNTRIES

The Outline of Reform stated that in the light of the agreed objective to promote economic development, the reformed monetary system will contain arrangements to help increase the flow of real resources to developing countries. One
suggested method was to link the issue of SDRs with development finance, either
through direct distribution to developing countries of a larger proportion of
SDRs or through allocation of a share of SDR issues to international and
regional institutions that provide development finance. I t was generally understood, of course, that even with the link the issue of SDRs would be determined
exclusively by the need for a trend growth of aggregate reserves. The Interim
Committee discussed this question at a number of meetings and reported a
diversity of views on the link, but agreed that it should be kept under active
study by the Executive Directors. This may be regarded as a polite parliamentary
way of shelving the proposal. I f the Fund is to provide more resources for developing countries, it will have to be done in other ways.
At the meeting in Jamaica the Interim Committee endorsed the long-standing
recommendation of the Executive Directors for a 32.5 per cent increase in quotas
rounded up to SDR 39 billion. By groups, the quotas of the oil-exporting countries
will be doubled, those of other developing countries increased proportionately
with the total, and those of the industrial countries increased less than proportionately. There are, however, considerable differences among individual members
in the percentage increase in their quotas. As the general increase in quotas will
not come into effect until the amendments to the Fund Agreement have been
adopted, the increase in their use of Fund resources before then has been provided in another way. The Interim Committee has agreed that until the amendments come into effect, the size of each credit tranche should be increased by
45 per cent so that total access under the credit tranches would be 145 per cent
(now 100 per cent) of the quota, with further assistance possible in exceptional
circumstances. The usual 25 per cent drawing limitation on the quotas in a
12-month period and a total of 100 per cent under all credit tranches, with further drawings requiring a waiver, will be resumed after the quota increases
have been approved and accepted.
The Bretton Woods Conference adopted a number of resolutions in addition to
the agreements on the Fund and the World Bank. One resolution was particularly related to the purposes of these institutions. I t stated:
"The United Nations Monetary and Financial Conference recommends to the
participating Governments that, in addition to implementing the specific monetary and financial measures which were the subject of the Conference, they seek
. . . to reach agreement as soon as possible on ways and means whereby they may
best... bring about the orderly marketing of staple commodities at prices fair to
the producer and consumer alike."
The Fund has long recognized that because of their very heavy dependence on
exports of basic commodities the developing countries are exposed to sharp fluctuations in their payments position. That was the reason why the Fund established a compensatory financing facility over ten years ago on which countries
could draw for the particular purpose of meeting a shortfall in their normal
export receipts. Since this facility was established some 30 developing countries
have drawn reserve credit of $1 billion in compensatory financing. The Interim
Committee showed great interest in increasing the availability of resources
through this facility. At the end of 1975, the Executive Directors decided that the
Fund would be prepared to authorize drawings up to 7' percent of a member's
quota (previously 50 per cent), provided outstanding drawings are not increased
by more than 50 per cent of the quota (previously 25 per cent) in any 12-month
period. Larger drawings may be met only if the Fund is satisfied that a country is
taking measures to deal with its payments problem.
The Fund is committed in. various ways to much larger use of reserve credit by
its members. To meet these commitments, the Fund will have to have more resources. I n part this will come later from the subscriptions to the general increase in quotas. The difficulty in the past has been that drawings have been
overwhelmingly concentrated on the currencies of the Group of Ten. At a time of
unusually great need by its members, the Fund has had to resort to borrowing to




146
meet their drawings—from the Group of Ten under the General Arrangements to
Borrow and more recently from the oil-exporting countries and other members to
fund the Oil Facility. I f the Fund is to meet its large commitments in the future,
it must be able to use the currency of any member under appropriate conditions.
The amendment of the Fund Agreement will provide that the Fund's holdings of
every currency should be usable in its operations in accordance with its policy—
presumably the currency of any country that has a payments surplus and adequate reserves. Within the next six months, before the amendment comes into
effect, members will have to make satisfactory arrangements for the use of their
currencies by the Fund.
The most important new step taken by the Fund to help developing countries is
the establishment of the Trust Fund for their benefit. The resources of the Trust
Fund will come from that part of the profits of the sale of the Funds' gold for the
benefit of developing countries which is not distributed to them directly in proportion to their quotas. The resources of the Trust Fund will be augmented by
voluntary contributions and some countries have already stated that they will
make such contributions. The Trust Fund is being established and the initial sale
of gold for its benefit are both being done under existing powers. As the amendment makes no provision for its permanent operation, its continuing operations
will depend on later increases in its resources. They could be increased from the
profits of additional sales of gold for the benefit of developing countries, and the
Fund will have such power under the gold amendment to the Articles of Agreement. I f this power is to be exercised, it can be done only with the approval of a
large majority of the total voting power. I n any case, such additional sales of gold
would not be made for four years—that is, after the first 25 million ounces are
sold. Additional resources could also come later from voluntary contributions by
members. The resources of the Trust Fund will be used to provide balance of
payments assistance on concessionary terms to low-income countries, initially
those with a per capita income not in excess of SDR 300 in 1973.
BOLE OP T H E I N T E R N A T I O N A L M O N E T A R Y F U N D

The first purpose of the Fund as stated in its Articles of Agreement is "to promote international monetary cooperation through a permanent institution which
provides the machinery for consultation and collaboration on international monetary problems." I n the 30 years of its existence, the influence of the Fund has
waxed and waned. Its influence declined in the past ten years as the Bretton
Woods system of fixed par values broke down and the international monetary
system passed through a series of crises involving the currencies of its largest
members, particularly the dollar. Nevertheless, the Fund remained the one institution through which all countries could collaborate in finding a solution to their
common problems. The fact that the agreed reform is being made through amendment of its statutes is evidence that the Fund remains the central institution for
collaboration on international monetary affairs. The effectiveness of the reform,
however, will depend not only on these amendments, but on the influence of the
Fund in securing the collaboration of its members in restoring a well-functioning
international monetary system.
The most dramatic change is in the exchange system which was regarded at
Bretton Woods as the raison d'etre of the Fund. I t should be emphasized that the
system of fixed but adjustable par values was a great advance over the gold
standard because it allowed a country to adjust the parity of its currency to the
state of its domestic economy rather than requiring the domestic economy to be
adjusted to a fixed parity that could not be changed except under the stress of a
great national emergency. Nevertheless, the Bretton Woods system was too inflexible. I t failed to recognize that conditions could arise under which many members
would be unable to determine or maintain an appropriate par value for an extended time. I t is interesting to note that the Fund Agreement made provision for
suspending the general obligation of members to maintain exchange rates based
on existing par values in an emergency. (Article X V I , Section 1 (a) ( i ) . ) I f such a
suspension had been voted, its extension would have required the approval of the
Board of Governors and ultimately an amendment of the Fund Agreement. The
change in the established system of fixed par values was made without invoking
the emergency provision, but followed a process similar to that in Article X V I ,
although oyer a much longer period. The amendment legalizing floating exchange
rates, without restricting the right of groups of countries to maintain stable
exchange rates for their currencies in terms of each other, corrects a defect in the
Bretton Woods system.




147
The Fund had only very limited powers to induce a member to change an
inappropriate par value and the fact is that some major currencies remained
undervalued or overvalued for extended periods. I n this respect, the influence of
the Fund may be greater under the new exchange regime. The Fund has been
given the positive duty to oversee the international monetary system in order to
ensure its effective operation. I t has a mandate to exercise firm surveillance over
the exchange rate policies of members and to adopt specific principles for the
guidance of all members on such policies. This responsibility applies to countries
with fixed rates as well as those with floating rates. Under these powers, the Fund
could establish standards for determining whether a surplus or deficit country
should undertake adjustment of its balance of payments through a change in the
par value of its currency on the basis of the changes in its reserves and in the
structure of its balance of payments. Similarly, the amendment imposes on the
Fund the duty to set guidelines for countries with floating rates. While these
guidelines will have to be very broad, they should provide a basis for requiring
countries to avoid large fluctuations in exchange rates not related to changes in
underlying economic conditions.
Much of the influence of the Fund has come from its role as a provider of
reserve credit. The latest increase of quotas will greatly augment its resources.
The disposal of 50 million ounces of its gold holdings will provide iit with SDRs
and currencies i t can use in its operations. The liberalization of drawings on the
compensatory financing facility will be of great help to countries exporting
primary products, particularly developing countries. The Trust Fund for very
low income countries is an innovation. I t will probably be maintained for an
extended time from the profits of further sales of the Fund's gold, although that
will require a large majority of the total voting power. The increase in its resources will make lit possible for the Fund to have greater influence on the policies of its members. The Fund must make sure, however, that these resources
are used only for reserve credit to meet temporary deficits in the balance of
payments.
The main area in which relatively little progress has been made is in the
integration of the diversity of reserves and i n the control of the growth of aggregate reserves. The international monetary system will continue to have a multiplicity of reserve assets—gold, reserve currencies and SDRs—although very
little use will be made of gold and perhaps much greater use will be made of
SDRs in international settlements. So long as there is a multiplicity of reserve
assets, the international monetary system could be disrupted by changes in the
preference of countries for holding one rather than another reserve asset. For
obvious reasons, members of the Fund will not exchange their gold and reserve
currency holdings for SDRs, certainly not under present conditions. I f the use
of the different reserve assets is to be integrated in the future, i t will have to be
done by establishing a Reserve Settlement Account in which countries earmark
all of their reserve assets and use them pro rata in international settlements.
Such a reserve system is not feasible while the pattern of international payments is seriously unbalanced and perhaps not until there is a widespread system
of fixed par values.
The importance of SDRs as a component of aggregate reserves will become
greater when the Fund resumes making new issues. Even i f the Fund were to
be cautious in the issue of new SDRs, it would be unable to control the growth
of aggregate reserves unless the growth of foreign exchange reserves were
halted. That would require countries to avoid increasing their foreign exchange
reserves. While there is much to be said for such a policy as a means of improving balance of payments discipline, it is not feasible so long as some countries—
at present, the oil-exporting countries as a group—have very large overall balance of payments surpluses and are increasing their holdings of reserves. Under
such conditions, the availability of foreign exchange to add to the reserves of
surplus countries provides an indispensable flexibility to the international monetary system. When a well-balanced pattern of international payments is restored, it may be feasible to control the growth of aggregate reserves. I f that is
to be linked with settlement of payments deficits in reserve assets, i t will be
essential to provide safeguards that assure the reserve currency countries that
their surpluses will also be settled in reserve assets.
I n the long run the influence of the Fund will be determined by developments
in the world economy rather than by changes in its statutes. I f the present monetary instability subsides and countries are better able to fulfill their obligations
to maintain orderly exchange arrangements and ito promote exchange stability,




148
the Fund will have great influence through its oversight of the international
monetary system. Its standards and guidelines may give it greater influence on
the exchange policies of iits members than the most rigid requirements on par
values and stable exchange rates. Furthermore, if the Fund is successful in
operating as a monetary authority providing reserve credit, and not as a supplementary source of resources for development, it will be able to influence the
financial policies of its members to help them toward attaining greater monetary
stability and a better-balanced payments position. Ultimately, the influence of
the Fund will depend on what its members want i t to be. I n this respect, the
Council of Governors, if it accepts the responsibility, will be decisive. I f the Fund
has the confidence of the Council, it will be able to perform the primary func :
tion for which It was created—to be a center for international monetary collaboration in the interest of all its members.

S T A T E M E N T B Y PBOFESSOB H E N B Y

HAZLITT

I am gratified by the privilege of submitting testimony to this distinguished
committee on the present proposed amendments to the I M F agreements.
My name is Henry Hazlitt. I am the author of fifteen books, most of them on
economic subjects, and one of them specifically on "What You Should Know About
Inflation." From 1934 to 1946,1 was a member of the New York Times Editorial
Board, and wrote most of that publication's economic editorials. From 1946 to
1966,1 wrote the signed weekly "Business Tides" column for Newsweek magazine.
From 1966 to 1969,1 wrote a twice-a-week internationally syndicated column for
the Los Angeles Times Syndicate. My book on foreign aid, "Will Dollars Save
the World?", published in 1947, was condensed to 5,000 words by the Reader's
Digest and published in all twenty of its international editions. I testified on the
original foreign aid proposals at that time at the request of both the House and
Senate Committees in charge of the implementing legislation.
The bill before your committee might most appropriately be labelled: "A Bill
to Promote Further American and World Inflation and Increasing International
Economic Chaos, and to Make it Almost Impossible for the World or Any Individual Nation Ever To Restore a Sound Monetary System."
This is not its actual title. Officially it is a bill "to provide for amendment of
the Bretton Woods Agreements Act, and for other purposes." I t is advocated by
the Treasury Department. Secretary Simon, testifying in its favor, called it "the
single most important piece of legislation in the international monetary sphere
since the Bretton Woods legislation itself." I n one sense he was right. I t would
work more havoc in that sphere than any legislation passed by Congress since it
accepted the Bretton Woods Agreements of 1944.
To view these latest proposals in perspective, it will help to recall a little history. Thirty-two years ago, a group of officials from some forty nations, under
the leadership of Lord Keynes of England and Harry Dexter White of the United
States, decided to set up a monetary system that would be a huge improvement,
they thought, over the classic gold standard because it would drastically reduce
the monetary role of gold. Only one currency, the U.S. dollar, would have to be
convertible into gold—and even then no longer at the demand of anybody who
held dollars, but only at the request of foreign central banks. All the other currencies were to be kept convertible merely into the dollar. W i t h the dollar
anchored to gold, and all the other currencies tied to the dollar, stability would
be assured, and the need for gold reserves would be minimized.
The system seemed to relieve every other country but the United States from
strict monetary discipline. I f any country got into trouble it was assured almost
automatic loans and credit to bail it out. The agreement also provided that any
nation could at any time devalue its currency by up to 10 percent, and explicitly
stipulated that "the Fund shall raise no objection." The real but unstated and
unacknowledged purpose of the Bretton Woods Agreements, as the present writer
pointed out at the time (in "The American Scholar," Winter 1944-45) was "to
make resort to inflation easy, smooth, and above all respectable."
As early as 19^9 the system started breaking down. The British pound was
devalued 30 per cent on Sept. 18 of that year—from $4.03 to $2.80. Twenty-five
other countries devalued within the following week. I n succeeding years there
were hundreds of devaluations of currencies in the Fund.
What had !t>eeri overlooked from the beginning was the erroneous increase in
the burden and responsibility that the Bretton Woods arrangements put upon the




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United States. For the other countries could hold dollar reserves on the assumption that this was just as good as holding gold reserves. But their currency
stability was, in fact, made dependent on the soundness of the dollar.
Yet successive U.S. governments remained completely oblivious of the gravity
of the responsibility we had assumed. Our officials kept undermining the dollar—
by foreign aid, huge domestic spending, chronic and mounting budget deficits,
and by pushing down domestic interest rates and increasing the money supply.
By 1968 we had practically ceased keeping the dollar convertible into gold,
even by central banks. And on August 15, 1971 we abandoned the gold standard
even officially.
Our repudiation of our solemn commitment was followed by mounting inflation, devaluations, and monetary disorganization everywhere. There seemed no
longer any point in maintaining fixed exchange rates. There was not even any
agreement on what they could be fixed to.
So what is our government now proposing as the cure? I t is proposing to intensify everything that caused the disease.
The chief effect of the International Monetary Fund from the beginning has
been to serve as an engine of inflation. The I M F is to be continued. Not only
that; it is to be given more resources to play with. The United States is to be
asked to turn over enough more dollars to increase its quota in the Fund by the
equivalent of 1,705 million Special Drawing Rights (SDRs). And the I M F is to
have its powers of inflation increased still further by being allowed to create
more SDRs and by the relaxation of certain rules to make the SDR "a more
usable asset."
What is an SDR? I t is paper money—a credit on a book—and it is to be issued
as a "reserve" against national paper currencies. What is an SDR worth? That's
an interesting question. When originally created in 1968, it was defined in terms
of gold—though never convertible into it. I t is now defined "in terms of a weighted
basket of the market exchange rates of 16 major currencies, with the dollar representing approximately one-third of the basket." So even the nominal value of
the SDR is changing every day and even every hour. But suppose you wanted to
convert it into something definite? Something you could measure, weigh, feel,
touch, or bite. What is par? You still don't seem to get the idea. I t has no par.
And the basket of currencies in terms of which it is defined has no par. The American dollar, one-third of that basket, is no longer to have any par. Nor any other
currency. Now do you understand?
And yet, Secretary Simon tells us, the U.S. and other members under the new
legislation accept "an obligation . . . to collaborate with the Fund toward the
objective of making the SDR the principle reserve asset of the international
monetary system." I t is not only to be "an asset" but the "unit of account."
How can it serve as an asset and a unit of account when its own value is
constantly fluctuating, and has to be recalculated every minute? Tomorrow, say,
the German mark rises in terms of the dollar and the dollar correspondingly
declines in terms of the mark. Has the mark risen or the dollar fallen? I n olden
days, when we had par values and gold standard, the answer was easy and
immediate, and suggested who should take the appropriate corrective steps. But
now? Ah yes, we have the SDR, the "unit of account." But the value of the SDR
is itself determined by the value, among other currencies, of the mark and the
dollar, and has just been changed by the change in their value. Talk about
relativity! Which is measuring which? Which is the image and which the mirror.
Have we entered Wonderland? Or a lunatic asylum?
What is to happen to gold, which for centuries served this international unit-ofaccount function among others? Gold is to be treated as if it were something
fair more dangerous than .heroin. We quote from the summary of Secretary Simon:
"The new provisions of the I M F Articles of Agreement also promote the process
of phasing gold out of the system—by abolishing the official price of gold and
gold's role as common denominator of the system, by eliminating all requirements
to use gold in transactions with the Fund, and by providing specific authority
for future disposal of the Fund's gold holdings."
That isn't all. Not only must gold continue to be dumped on the market, depressing the price so that our monetary mismanagers can avenge themselves on the
"gold bugs"—that is, on the people who seek a refuge for their otherwise evaporating paper money savings—but government or central bank buyers must be
prevented from entering the market as buyers.
As Secretary Simon says elsewhere, in addition to the present proposed legislation, "important side arrangements have been agreed among the Group of Ten—

76-795 O - 76 - 10




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the major gold-holding nations—to assure that gold does not re-emerge as a major
international monetary asset." Their understanding provides that participating
nations "will not act to peg the price of gold" and "will agree not to increase
the total stock of monetary gold." That is, they will agree not to be buyers, no
matter to what temptingly low levels the I M F sales reduce the price of gold.
The Fund is to be "prohibited from accepting gold except by specific decision,
by an 85 per cent vote." I t is to be "empowered to dispose of its remaining gold
holdings," and it is to be turned in effect into another giveway agency. The
proceeds of its gold sales are to be "used for the benefit of developing countries."
Let us remember that it is the American people's gold that is to be simply given
away.
This is madness. Currencies are depreciating and in chaos everywhere because
the world's monetary managers and officeholders, and specifically our own, did
not have the integrity to abide by the requirements of the gold standards. So now,
instead of acknowledging that this was mainly if not solely the result of their
own bad faith and endless issuance of excessive paper money, they seek to make
the gold standard itself the scapegoat, and to get legislation passed that would
immensely increase the harm already done and tend to perpetuate international!
currency chaos.
I f we ask what should be done instead, the first and main part of the answer
is simple. Abolish the I M F . I t has been from the beginning mainly an engine
promoting international inflation. Whatever stabilizing function it may once
have served ceased completely on August 15,1971, whn the U.S. openly abandoned
gold convertibility for the doHlair. The I M F ' s continuance now is inexcusable.
Gold, the only reail asset of the Fund, should not be sold, but should be returned
to the individual nations that originally turned it over to the Fund. I t should
be given back in proportion to each nation's present quota in the Fund. No
further printing of SDRs should be permitted. Outstanding SRD's should be
cancelled, and their holders compensated in gold at approximately the closing
open market price of that metal (in terms of SDRs) on the day before the
decision is reached and announced. This gold would be deducted pro rata from the
amounts each country would otherwise receive back from the Fund in proportion
to its quota.
Then each country would be on its own, and once more fully responsible for the
soundness of its own currency. I f it got into trouble, it could claim no automatic
credit firom other countries, but would be obliged to turn to private creditors.
That might do something to restore discipline.
Inflation in most individual countries would no doubt continue for a while, but
countries would at least cease exporting their inflations to each other.
For a variety of reasons, government return to a gold standard would probably
not for a long time be practicable. But what Congress can and should do immediately is to provide that contracts calling for payment i n gold (or, for that
matter, in silver, platinum, or what not) voluntarily entered into by private
parties, shall not only be legal but enforceable in the courts. When governments
can no longer compel everybody to do business in their depreciating paper
currencies, the prospects for monetary reform will be appreciably nearer.

M R . Y E O ' S A N S W E R S TO Q U E S T I O N S S U B M I T T E D BY M E M B E R S OF T H E S U B C O M M I T T E E

Question 1. How will the system of floating exchange rates be managed under
the Jamaica agreement? How will countries who ignore the Fund's principles be
called to account? What would you recommend that the United States do to
make certain that the I M F does in fact exercise firm surveillance over the exchange rate policies of members? By accepting these amendments and the quota
increase is the United States relinquishing bargaining leverage which could
be used to promote adoption of sound adjustment principles?
Answer. The new Article I V sets forth members' general obligations to pursue
underlying economic stability and to avoid action to manipulate exchange rates
or the system to prevent effective balance of payments adjustment or gain
unfair competitive advantage over other members. The Article specifies that
countries may adopt exchange arrangements of their own choosing, subject
always to their general obligations. I t directs the I M F to oversee the operations
of the system and the compliance of members with their obligations. And i t
directs the Fund to exercise firm surveillance over members' exchange policies




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and tx> establish principles for the guidance of members with respect to those
policies.
These obligations and principles will form the basic framework for operations of the system. The I M F will have a variety of means for assuring that
the principles are followed by members once they are agreed: informal consultations ; informal reports on members' policies; published reports. Ultimately, if
a member ignored the I M F ' s recommendations, the I M F could suspend its rights
to use I M F resources or require the member to withdraw from the I M F . The
I M F is directed by the proposed new Article I V to exercise "firm surveillance".
This is the desire of the I M F membership, and the U.S. will press in the I M F
for the effective application of this provision.
Acceptance of the amendment does not mean that the U.S. is relinquishing
"bargaining leverage" for adoption of sound adjustment principles. To the contrary, recommendations for adjustment are likely to be much more effective
and acceptable if they come from an international organization rather than
from an individual country; and the amendment will provide the essential legal
framework for development of needed principles in the I M F . U.S. failure to accept the amendment would negate this agreed legal framework and would
seriously undermine our ability to negotiate with others on monetary matters.
Question 2. Under the proposed new Article I V of the Articles of Agreement,
each member country undertakes an obligation to direct its economic and financial policies toward the objective of fostering orderly economic growth
with "reasonable price stability". What is the meaning of that undertaking?
What is meant by "orderly economic growth" and "reasonable price stability?"
There is little, if any consensus in this country about the meaning of those
goals, about the relative burdens of inflation and unemployment. How can we
expect any consensus on this point in the international community when there
are widely divergent views on the relative importance of inflation and unemployment and, hence, about the direction of economic policy? How is the I M F
to decide, in light of this divergence of view, whether a country is "fostering
orderly economic growth with reasonable price stability" and, hence, whether
a country may have access to I M F credit?
Answer. The philosphy of the new Article I V is that monetary stability results, not from maintaining (or trying to maintain) par values, but from developing conditions of underlying economic and financial stability in I M F
member countries.
As part of this fundamental orientation each member undertakes an obligation to "endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with
due regard for its circumstances."
Obviously there can be no single simple definition of "orderly economic growth"
or "reasonable price stability" which would cover all nations and all time
periods. Orderly economic growth might not mean exactly the same thing for the
U.S. economy and for that of Papua-New Guinea, to take the largest and one
of the smallest members. Nor might reasonable price stability be the same in
the context of 1970's, for example, as in the early 1960's.
These two specific phrases are objectives against which nations policies are to
be measured and their performance tested. But the assessments must be on a
case by case basis taking full account of the individual country's situation.
Such assessments will reflect the judgment of the IMF—through its Executive
Board and perhaps other I M F bodies—based on case study, and thorough examination of all circumstances. Only in this way can it be determined whether a
country is fulfilling its obligations to work toward economic and financial
stability.
Question 3. Under the proposed amendments, the Fund is called upon to adopt
"specific principles" for the guidance of members with respect to exchange rate
practices? What principles are likely to emerge? Why weren't they a part of the
new agreement? Does their absence mask fundamental differences in attitude
and approach? I f so, is there any reasonable expectation of their being ironed
out in the future? What principles should govern exchange rate practices?
Answer: Specific I M F principles to be established under proposed new Article
I V have not yet been agreed. However, the fundamental approach is fully agreed
and is specified in the new Articles; this fundamental agreement will form the
basis for development of specific principles. The I M F Executive Board is beginning its work on specific principles, with a view to putting them in place when




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the amended Articles take effect. I n developing these principles, i t will be important to preserve a substantial degree of flexibility and adaptability. This is one
reason why it was not considered desirable or appropriate to write specific guidelines into the new Articles—the Articles constitute a constitution, not a contract. Flexibility is needed for several reasons:
The basic procedural approach may be changed, e.g., through a decision to
apply par values (by an 85 percent majority).
The individual characteristics and circumstances of each country must be
taken into account on a case-by-case basis, within a general framework of
agreed objectives and obligations.
The system, countries' perceptions, and international guidelines must be
permitted to develop and evolve as the world economy evolves.
The important points are that the basic approach must be right, and that we
avoid such precision and rigid detail in establishing the overall framework that
the system exceeds its bounds because of the inability of the rules to adapt to
real, compelling needs. This is what happened under the present par value provisions of the I M F Articles. The par value system could not be sustained, but no
other system was legally tolerated. The consequence was a breakdown of compliance with the law. This is an extremely dangerous, potentially infectious situation. We are fortunate that countries have maintained the collaboration and
cooperation that have developed with 80 years of adherence of the purposes of
the Fund. But the rule of law, and one that respects the dynamics of the world
economy, must be restored.
Question 4. I n 1972 Secretary Shultz proposed at the annual I M F meeting
that the level of reserves might be used to indicate whether a country was following an appropriate adjustment policy. That was under a pegged rate system,
of course, but some economists have proposed that a reserve-level indicator
would also be useful under a system of managed floating. I n your opinion would
it be useful to have objective indicators or "presumptive guidelines" for judging
the appropriateness of exchange rate policies of I M F members?
Answer. Some role for objective indicators or "presumptive guidelines" may
prove useful and appropriate as part of the process of reaching judgments about
exchange rate policies, and this question will be considered carefully as the
principles to be established under Article I V , Section 3 are developed.
Question 5. One of the problems with the floating exchange rate system is
that the rates fluctuate too, widely. Do you have any suggestions for reducing
fluctuations, for dealing wTith "disorderly market conditions?
I n that regard, what role should bilateral or other arrangements outside the
I M F , play in helping other countries meet balance of payments difficulties? The
recent Group of Ten $5.3 billion loan to the U.K. is an example of assistance
outside the Fund. To the extent that such assistance permits a country to avoid
changes in its economic policies doesn't it undermine the very purpose of the
amended Articles, viz, to force a country to adjust its economic policies in order
to foster orderely economic growth?
Answer. Implicit in the first question is the view that "fluctuations" in exchange rates are an indication of "disorderly market conditions." This is not
necessarily true. Fluctuations can represent perfectly rational and desirable
market responses to changing economic and financial conditions. I f rates fluctuate widely, it is likely to be because the underlying economic trends in the
countries concerned are diverging widely. The way to reduce the wide fluctuations is for countries to achieve the orderly underlying conditions that are
prerequisite for exchange stability. That is the philosophy of the new Article I V .
I t will also discourage those economically irrational situations known as "disorderly market conditions."
Both multilateral and bilateral balance of payments financing should be directed at the same objective—promoting a smoothly functioning international
monetary system in a manner consistent with members' obligations in the I M F .
The I M F provides medium-term financing (usually 3 to 5 years), normally
conditional and keyed to an economic program designed to correct the problem
causing the need for the financing, usually requiring weeks or months to arrange,
and multilaterally negotiated and implemented through the institution of the
Fund. Credit from the Support Fund, supplementing the I M F , would also be
made available on a medium-term basis and only in connection with policy conditions. Bilateral currency swaps such as the credit package recently arranged
for the U.K., provide short-term financing (usually 3-6 months), normally




153
aimed at dealing with disorderly market conditions, can be mobilized quickly in
event of emergency, and are implemented through one or several bilateral agreements. Somewhat more extended bilateral credit may also be appropriate in certain Circumstances, as is discussed in more detail in the answer to question 17.
The two types of arrangements thus differ in term and character, and in all
cases should be complementary, not competitive. This complementarity was
recently exemplified by the recent $5.3 billion swap with the United Kingdom,
where the funds were made available for a maximum of six months to the U.K.
to deal with a disorderly foreign exchange market. However, if funds could
not otherwise be repaid within that period, the U.K. would draw from the I M F ,
undertaking the economic program necessary for such drawings. I n other words,
if the U.K. financing needs turned out to be not just a result of disorderly
markets but something more fundamental, the U.K. would adopt the needed
corrective measures.
Question 6. Although the amendments legitimize floating rates and leave
members free to select their exchange rate arrangements, there is a provision
for the Fund, by an 85 percent majority vote, to reinstate a general par value
system. Under what circumstances if any, would you recommend that a general
system of par values be reinstituted?
Answer. We do not at present foresee circumstances that would lead the
United States to recommend adoption of a general system of par values.
Question 7. The I M F has already agreed to dispose of Ys of its total gold
holdings, with %th to be restituted to Fund members and the proceeds from
sales of the other %th to be allocated to a Trust Fund for the benefit of developing countries. The overall goal of the amended Articles is to phase gold out
of the international monetary system entirely. How, and under what circumstances, should the remaining gold holdings of the I M F be disposed of? Is
there any agreement on that among Fund members right now?
Answer. Decisions on the disposition of the remaining 100 million ounces of
I M F gold holdings have not been considered. The proposed new Articles (Article
V, Section 12) provide that the I M F may, by an 85 percent majority vote, decide
to dispose of these holdings by sales at market-related prices or sales at the
book value of approximately $42 per ounce to I M F members.
Question 8. What factors or principles will govern the rate of disposition
of the %th of the Fund's gold holdings which the Fund has already decided to
sell? Is there a danger that the Fund w i l l be under pressure from, say, France
and South Africa, to go slow in disposing of those holdings in order not to
depress the price of gold? What is the United States attitude in that regard?
W i l l the U.S. go along with any attempt to stagger or delay I M F gold sales
in order to avoid depressing the price of gold? Is there anything to prevent the
Fund from behaving in that fashion? And won't the same concern, namely, fear
of depressing the price of gold, generally tend to slow down future I F M dispositions of its gold holdings?
Answer. The I M F has decided that the %th of Fund gold holdings (25 million
ounces) to be disposed of for the benefit of developing countries will be sold
over a four year period. Of the 16 auctions planned for the first two years, two
have been concluded and the third is scheduled for September 15.
I t is the United States' view that the best technique for disposing of the
gold is through a series of regularly scheduled auctions, along the lines followed
thus far. I n that way, the amounts are sold over a reasonable period and do
not have an exaggerated market impact, and the market knows what to expect.
I n our view, markets function best when uncertainty is reduced, and the I M F
will obtain a greater return for its gold than if there is uncertainty about what
the I M F plans to do. W i t h regularly-spaced auctions, the I M F will sometimes
get a relatively high price, sometimes a relatively low price, but over the whole
period w i l l get a fair price as determined by market forces.
The United States and other countries have agreed to eliminate the official
price of gold and not to try to peg the price at any particular level. I t follows
that we do not think there is a particular price of gold that is "correct", nor
would we regard any particular price as "too low" or "too high" if determined
by the market. We would not favor delaying the planned gold sales on grounds
that the price has declined. I t should be emphasized that neither the I M F nor
the U.S. has a price objective for gold—no one is trying to drive down the market
price of gold. The purpose is simply to convert the 25 million ounces of I M F
gold into usable currencies, in an orderly way, for the benefit of the I M F
General Account and the Trust Fund.




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I t would be a mistake to exaggerate the impact of I M F gold sales on the price.
During 1973 and 1974 the price of gold rose sharply, from around $65 per ounce
to nearly $200. Since then, the price has declined for a variety of reasons:
Americans failed to buy large amounts for investment—as some had anticipated—when prohibitions were removed; industrial and jewelry demand fell
sharply when the price was high; recession in major countries reduced demand;
better performance with respect to inflation restored confidence in certain currencies; and balance of payments deterioration in major producing countries
reduced the prospects of withholding supplies. The I M F sales added only a
moderate amount to total supplies coming on the market—which, even with
I M F sales, are below the levels of a few years ago.
Question 9. W i l l the agreements actually result in phasing gold out of the
international monetary system? The Group of Ten arrangement, under which
the major industrial countries agreed to limit their total gold purchases and
not to peg the price of gold, lasts only two years. I f the Group of Ten arrangement expires, will the place of gold as a reserve asset be likely to grow? Should
the United States press for an extension of that arrangement? W h y was i t
limited to two years? What additional measures should be taken to reduce the
role of gold in the monetary system?
Answer. The U.S. believes that the agreement effectively places gold on a
one-way street out of the monetary system. The Group of Ten arrangement is a
transitional safeguard, designed to protect against possible reemergence of a
central role for gold during a period in which the basic legal position of gold
under the I M F Articles is being changed importantly, and while the process of
disposing of I M F gold is getting underway. An initial period of two years for
these arrangements appeared reasonable and was generally satisfactory.
Whether the arrangements should be extended beyond two years w i l l have to
be decided in the light of circumstances and experience toward the end of the
two year period. I n any event, we do not believe additional measures are needed
at this time. Current experience is providing convincing evidence of the unsuitability of gold as a basis for the monetary system.
Question 10. There has been some discussion of "substitution accounts" as a
means of consolidating reserves and thereby reducing the risk of sudden shifts
from one reserve asset to another. The I M F ' s Committee of Twenty recommended
establishment of a "substitution account" in the Fund for members to exchange
gold or reserve currencies for SDKs, but the Jamaica agreements did not include
a "substitution account". Do you favor the establishment of "substitution accounts" as a way of reducing the risk of sudden shifts from one form of reserves
to another? Would "substitution accounts" tend to reduce the role of the dollar
as a reserve currency, and, in your judgement, would that be good or bad for
the United States? Would amendment of the Articles be necessary before "substitution accounts" could be established in the I M F ?
Answer. The question of a possible "substitution account" for currencies and
gold was studied by the I M F ' s Committee of Twenty, in the context of a monetary system based on par values and official convertibility of currencies into
other reserve assets. The C-20 did not reach a decision on the desirability of
such an account, nor did it recommend the establishment of such an account.
Since the C-20 deliberations, the system has evolved substantially, away from
the par value/official convertibility orientation that was the focus of much of
the C-20's work, and the possible roles and purposes of a substitution account
have become less clear. Partly as a consequence of this evolution, interest in
the subject has diminished, and proposals for creation of a substitution account
were not a major part of the Interim Committee's work. The Interim Committee
agreed that the subject should be kept under study, but did not include it in the
package of amendments that has been agreed upon.
Question 11. The Jamaica agreements state that the SDR should become the
principal reserve asset. Do you agree with that objective? I f so, what measures
need to be taken to make the SDR the principal reserve asset? I f not, what
should the principal reserve asset be?
Answer. The United States and the rest of the I M F membership have agreed
"to collaborate to ensure that their policies on reserve assets are consistent with
making the SDR the principal reserve asset in the system."
The proposed amendments incorporate major changes in the provisions relating to the SDR to make it a more important and useful instrument
Specifically:




155
The SDR replaces gold as the main instrument for I M F transactions.
The SDR replaces gold as the numeraire of the system, the unit of
account for the I M F .
Provision is made for changing the procedure for valuation of the SDR
if that becomes desirable in light of the evolution of the system.
The scope for voluntary transactions in SDR by members, without meeting
the requirement of balance of payments need, has been greatly enlarged.
The provisions for prescription by the I M F of various types of transactions in SDR have been eased.
The concept of "other holders" (i.e., entities that are not participants in
the SDR facility but who may accept, hold and use SDRs in transactions)
has been broadened, and the variety of transactions that other holders may
engage in has been liberalized.
The rules for designation of countries to accept SDRs may be changed at
any time, and not only at five-year intervals as at present.
The rules for reconstitution (repurchase of SDRs to restore holdings to
at least 30% of allocations on average over 5 year period) may be reviewed
at any time, not only at 5 year intervals, and may be changed by a 70 percent
majority vote instead of 85 percent.
All countries must collaborate to ensure that their policies on reserve
assets are consistent with making the SDR the principal reserve asset in
the system.
Together these changes represent a major liberalization of the rules applying
to the SDR, a major increase in its use in the I M F , both as a transactions
medium and as unit of account. At this time, SDRs represent a relatively small
portion of total assets included in nations' monetary reserves—consisting also
of members' I M F positions, gold and foreign exchange holdings—and we do not
foresee a major change in this situation at this point. More radical proposals
discussed during the reform negotiations for expanding the role of the SDR—
for example by substituting SDRs for currency balances—did not command
widespread support at the present stage of monetary evolution.
Question 12. The Jamaica agreements have been criticized for failing to provide an effective system for controlling the growth of international liquidity,
and therefore contributing to world inflation. Is this a serious problem which
should be given high priority in future negotiations? What arrangements would
you suggest for controlling international liquidity? Does the increase in quotas
and the increase in I M F special credit facilities add significantly to international
liquidity? What about the Eurocurrency markets—should they be included in a
system to manage international liquidity?
Answer. Some have expressed concern that the new system does not establish
formal I M F control over the level and growth of international reserves. This
matter was discussed at great length in the reform negotiations. But no group,
neither the developing countries, the oil exporters, nor the industrial nations
showed any willingness to accept the restrictions on their ability to borrow,
lend, or acquire currencies that would be necessary to establish quantitative
limits on reserves. There is in addition considerable doubt in many quarters
that placing such power of decision in an international body would be either
effective or desirable. An attempt to do so would be likely to result only in long
and inconclusive negotiations that could postpone, possibly indefinitely, the
badly needed revision of the Fund Articles on which international agreement
has been reached. At the very least, the time for such a move would appear
to be well in the future, not now. The proposed increase in I M F resources
is not large in terms of total reserves, but it is particularly significant in that
it will enable the I M F to maintain its role as a providor of conditional credit to
its members, to compliment needed programs of balance of payments adjustment.
Question 18. A t Jamaica and in other recent decisions, the I M F has adopted
and expanded so-called "special facilities" which provide credit to member
countries in addition to normal I M F credits. The "special facilities" include
the Compensatory Financing Facility, the Buffer Stock Facility and the
Extended Fund Facility. I n addition, a Trust Fund has been established
to distribute to developing countries on a concessionary basis the proceeds from the sale of one-sixth of the Fund's gold. These arrangements raise
concern that the Fund is being converted into an aid-granting agency. Is the
I M F being used to extend foreign aid without going through the process of
Congressional authorizations and appropriations? Are these new functions consistent with the purposes of the Fund?




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Answer. The I M F is not becoming an "aid-type" institution. While the I M F
has established several "special" facilities, some of which are directed to balance
of payments financing problems of a sort more characteristic of developing
countries than of industrial nations, i t is important to note that:
I n all cases, financing is provided to meet balance of payments needs and
not for project or other development programs;
The I M F requires economic and financial policy conditions appropriate
to the particular payments problems for which the facility is designed and
to the economic circumstances of the country concerned; and
I n no case is use of any I M F facility restricted to developing countries.
Consistent with the Fund's basic principle of uniform treatment of members, use is open to any I M F member whose payments problems and needs
fulfill the requirements of the particular facility.
With respect to the special facilities of the Fund
The oil facility was used much more heavily by developed than by developing members;
The buffer stock facility has been used only in very limited amounts, by
only five developing members in connection with one international buffer
stock ( t i n ) , but is open to any member that qualifies.
The compensatory finance facility is designed mainly for producers of
primary products and has been drawn upon by both developed and developing
countries;
The extended Fund facility has been drawn upon twice, in both cases by
developing members, but would in principle be open to any member implementing a major program of structural balance of payments adjustment;
The temporary expansion of access to the regular I M F resources applies
to all members, on the basis of the I M F regular conditions.
The Trust Fund—designed to provide emergency balance of payments support
to the poorest members on highly concessional terms—does represent a departure in that it is limited to a particular group and will provide financing on concessional terms. I t is for this reason that it is a separate legal entity, with no
I M F liability involved. Its purposes are the same as the I M F ' s in that i t w i l l
provide balance of payments financing, tand i t will provide financing only when
I M F requirements of balance of payments need and policy conditionally are
fulfilled.
Question 14. The debt of developing countries has been growing quite rapidly
in recent years. Isn't the level of indebtedness and debt service becoming a
severe problem, and if so, does it help to ease the access of these countries to
I M F credit? Would it be better to allocate SDRs to meet part of the need?
Should future issues of SDRs be linked to development finance? Should SDRs
be allocated to the World Bank and to regional development banks, as some
economists have proposed?
Answer. The debt problem of developing countries will not in our view be
helped by creating large amounts of unconditional liquidity, for example by
SDR allocations, at this time. There has been massive financing of balance of
payments deficits in recent years. The need now is for greater emphasis on adjustment, facilitated by conditional financing—for example, through regular
I M F credit.
I t would be a mistake to agree to "link" the SDR to aid or development financing, through development lending institutions or otherwise. A link would seriously undermine the SDR, and shift its basic character from a monetary instrument to an aid instrument. W e are opposed to any such link. The SDR-aid link
is not included in the package of proposals.
Question 15. The Fund is in the process of selling one-sixth of its gold for the
benefit of developing countries. Would you favor or oppose further sales of Fund
gold beyond the amount already being sold? I f so, should the same formula be
used? I have in mind the provision whereby the larger middle income countries
have been permitted to skim off some of the cream before the poorest countries
get their share, the so-called "direct access" question.
Answer. W e would hope that the I M F would eventually dispose of all of its
gold holdings, although we have no specific proposals at this time for sales
beyond the amounts that have already been agreed, nor for the techniques that
should be used for such sales.
Question 16. Why do we need the Exchange Stabilization Fund at all? Its
original purpose was to stabilize the exchange value of the dollar. Efforts to




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stabilize the dollar's exchange value would be inconsistent with the goals of the
amended I M F Articles, wouldn't they? I n what circumstances, then, should the
resources of the Exchange Stabilization Fund be used?
Answer. The Exchange Stabilization Fund, since its establishment in 1934,
has been an important tool in carrying out U.S. international monetary and
financial policy to promote a smoothly-tunctioning world economy. While U.S.
participation in the International Monetary Fund provides the core of U.S.
international monetary cooperation, the ESF has continued to serve an extremely useful role in complementing the work of the I M F . Indeed, it was the
Bretton Woods legislation in 1945, authorizing U.S. participation in the I M F ,
that established the E S F as a permanent fund, with Congress expressly recognizing the need for its continued existence.
While the E S F in the past was used in the context of a par value system, to
stabilize the exchange value of the dollar, the ESF will continue to have an important function under the new monetary arrangements.
A central principle of the proposed amendments to the I M F Articles of Agreement is that orderly exchange arrangements can best be assured by fostering
orderly underlying economic and financial conditions and an international monetary system that does not produce erratic disruptions. Within this context, each
member "undertakes to collaborate . . . to assure orderly exchange arrangements
and to promote a stable system of exchange rate." Consistent with the current
international exchange arrangements—where the exchange value of the U.S.
dollar is determined by market forces and is not maintained at any particular
rate relative to one or more other currencies—and our obligations under the
amended Articles of Agreement, the Secretary of the Treasury will need the
capability to counter disorderly exchange market conditions. Use of the E S F
to promote a smoothly-functioning international payments system in the future
will continue to be adapted to reflect the evolution of the international monetary
system and the U.S. obligations in the I M F .
Question 11. The bill amended in the House to delete the provision of the Gold
Reserve Act of 1934 requiring an annual audit of the Exchange Stabilization
Fund, substituting therefore a requirement that the Secretary of the Treasury
make an annual report on the operations of the Fund to the President and to
the Congress. Why shouldn't the Exchange Stabilization Fund, which after all
is a $2 billion plus resource, be subject to an audit of all its operations? And
why shouldn't its use be restricted to short-term lending exclusively, so that it
doesn't compete with the I M F ?
Answer. Due to a technical error in the comparative type of H.R. 13955 in both
the House Committee on Banking, Currency and Housing and the Senate Foreign
Relations Committee reports, it appears in those reports that Section 10 of the
Gold Reserve Act of 1834 is being amended by H.R. 13955 to substitute an annual
report of the E S F by the Secretary of the Treasury for the prior statutory requirement of an annual audit of the ESF. I n fact, this change in Section 10 of
the Gold Reserve Act was made by P.L. 91-599, December 20, 1970. H.R. 13955
does not change the existing statutory audit requirements.
I n 1970, Congress amended Sections 10(a) and 10(b) of the Gold Reserve
Act to:
(1) Delete from the Gold Reserve Act the provision requiring a Treasury
audit of the E S F and substituted a requirement for an annual report on
the operations of the E S F by the Secretary; and
(2) Provide for a GAO audit of the ESF's administrative funds.
Treasury in fact has continued to conduct annual audits of E S F operations,
despite the repeal in 1970 of that requirement. Two audits are made of the E S F :
one, by an Audit Committee selected from the audit staffs of Treasury bureaus
not connected with the E S F ; and, the other, by the departmental staff of the
Office of the Secretary. The Audit Committee's Report is made part of the Annual
Report of the E S F submitted by the Secretary to the President and the Congress.
; I n authorizing the GAO audit of E S F administrative expenses, the Congress
fully recognized that an outside adudit of E S F operations might hinder immediate and responsive action through use of E S F in international financial
operations. House Report 91-1057 (91st Congress, 14-15), commenting on the
statutory authorization of a GAO audit, specifically states:
"The E S F deals in extremely confidential and highly sensitive monetary transactions with foreign governments. I t is important not only that such transactions
and the arrangements underlying them remain confidential, but also that nothing
be done which would in any way impair the confidence of foreign governments




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in the continuing confidentiality of such transactions. The prospect of decisions
of the Secretary of the Treasury with respect to transactions through this Fund
being subjected to possible public question and debate would undoubtedly be
disturbing to markets and to foreign governments, and would therefore hamper
the use of the Fund by the Secretary of the Treasury for its intended purpose.
"The committee recognizes . . . that foreign exchange operations and other
aspects of international financial policy must not be subject to premature disclosure. Broad discretion must be left to the Secretary of the Treasury on the
matters that must not be disclosed."
These concerns and conclusions of the Congress in 1970 are equally valid today,
so that a GAO audit of E S F operations would not only be unnecessary but also
inappropriate.
Although the E S F is likely to be used primarily for Ahort-term lending, a
statutory requirement that it be used for short-term lending exclusively would
not be appropriate and would unnecessarily impair U.S. flexibility, especially in
unforseen circumstances, in implementing our international monetary policy.
While operations have on occasion been used to complement I M F lending, no
question of "competition" with the I M F would be expected to arise. The F S F —
with such limited resources—in fact could not "compete" with the I M F as a
major source of balance of payments financing.
I n the terms of the recent swap arrangements with the United Kingdom, both
the Treasury and the Federal Reserve provided short-term credit, with a clear
understanding that the credit would not be extended for a longer period and
that the U.K. would, if necessary, draw from the I M F for longer-term financing where appropriate policy conditions would be applied. Thus Treasury policy
is in accord with the policy objectives of the proposed amendment to H.R. 13955.
However, to place that limitation in a statutory provision could impair necessary
U.S. flexibility in negotiating and arranging appropriate financing packages in
the future and so be undesirable from the viewpoint of the Congress as well as
the Treasury.
For example, it is conceivable that, in some instances, use of the E S F for a
somewhat more extended period may be necessary. External factors (such as
natural disasters, trade embargos, unforseen economic developments abroad,
etc.) may lead a country which has obtained a short-term credit from the E S F
to seek an extension of that credit. I t is also conceivable that political assasination or other unanticipated catastrophic event might jusify a longer exension of
credit, and the possibility of E S F operations in such cases should not be excluded.
I n none of these cases would the E S F compete with the I M F , and in all of these
cases it well may be in the U.S. interests to provide somewhat more extended
E S F financing.
M R . YEO'S A N S W E R S TO Q U E S T I O N S OF SENATOR

HELMS

Question. I f there is a system of floating, adjusting exchange rates, do the
loans made by the I M F simply postpone needed adjustments? Particularly, are
the longer-term loans of the Trust Fund postponing the adjustments in currency
values that should be made under the new system?
Answer. Widespread floating of currencies does not eliminate all balance of
payments problems and does not eliminate all need for official balance of payments financing. Of course, the currencies of most countries at present are not
floating but are pegged to one or more other currencies. Moreover, those countries whose currencies are floating (the large industrial countries for the most
part) do not allow them to float freely, but intervene in varying degrees. The
purpose of I M F credit is not to avoid adjustment, but rather to provide temporary financing while adjusment takes place. Thus I M F drawings are conditional, and ordinarily tied to the introduction of an adjustment program designed
to correct the balance of payments problem which caused the need for the financing. Trust Fund financing is of the same charatcer—provided in each case only
if there is a finding of balance of payments need, and i f the borrowing country
adopts appropriate adjustment measures. Thus financing facilitates balance of
payments adjustment rather than postponing it.
Question. I f I M F quotas are looked upon as bank deposits, a resource available
to the U.S., shouldn't it be included in the normal budget process just as other
Federal loan programs? I note that the $2 billion loan authority for the Secretary




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is for funds already appropriated. I s it not inconsistent that these I M F loan
funds would be appropriated and the quota increase be exempt from this process?
Answer. I t is because I M F quota subscriptions are similar to bank deposits
that they should not be treated the same as Federal loan programs. Payment of
an I M F quota subscription is an exchange of assets—we provide dollars and
receive drawing rights, which we can use in case of need. Under Federal loan programs we do not receive such a drawing right. This treatment of I M F quota
subscriptions was introduced following recommendations from the President's
Commission on Budget Concepts in 1967. I t differs from the technique followed in
earlier quota increases, and for U.S. loans to the I M F under the General Arrangements to Borrow, authorized before the adoption of the concept proposed by the
Commission.
Question. I am aware of the question of the legality of the I M F establishment
of the Trust Fund, but would you provide for the record your analysis of this
matter? Would you agree that the Board of Governors of the I M F is the final
determiner of what is "legal" under the Articles of Agreement?
Answer. The I M F Trust Fund was established by the entire I M F membership
and without objection, by an Executive Board decision on May 5, following the
agreement in Jamaica in January that action should be taken both to start without delay establishment of the Trust Fund financed largely through profits on the
sale of 1/6 of the I M F ' s gold, and to "restitute" 1/6 of the I M F ' s gold to all
members in proportion to quota. Gold sales to finance the Trust Fund, as well as
the agreed restitution, will be conducted over a period of 4 years.
Establishment of the Trust Fund and its financing through gold sales is legally
authoribed under the present I M F Articles of Agreement. The I M F will replenish
its holdings of usable currencies through sales of gold to members at the current
"official price" (about $42 an ounce). The I M F has often replenished its currency
holdings pursuant to Article V I I , Section 2 in this way, and the gold held by the
I M F was, from the outset, intended to be used precisely for this purpose. The I M F
needs these usable currencies to finance its rapidily expanding balance of payments financing operations. These members will then resell, at the same price, the
gold received to the Trust Fund. The Trust Fund will auction the gold and use the
profits to provide balance of payments financing on terms appropriate to the needs
of developing members in the immediate period.
This financing of the Trust Fund is an appropriate use of the I M F ' s gold. The
secondary result of the I M F ' s replenishment operation—i.e., financing the Trust
Fund, is fully consistent with the I M F ' s purposes, including the objectives of
promoting international monetary cooperation, maintaining orderly exchange
arrangements among members, and providing balance of payment financing to
members.
On the question of determining what is "legal" under the I M F Articles of Agreement, Article X V I I I provides that any question of interpretation of the provisions
of the Fund Articles raised by an I M F member, in the first instance shall be submitted to the Executive Directors for their decision. Any member of the Fund
may appeal a decision of the Executive Directors to the Board of Governors,
whose decision is final. This procedure is in accordance with the procedure established by the charters of most international financial organizations; and, it is
wholly appropriate for the I M F members to determine the scope and manner in
which they intend to be bound by their acceptance of the I M F Articles of
Agreement.
Question. I understand that the U.S. position at .the Jamaica meeting favored
the establishment of the Trust Fund. Could you explain the justification behind
this position? Would the Treasury, in its efforts to remove gold from its role
in international monetary matters, favor a simple restitution of gold to the members of the I M F , in accordance with the provision in the Jamaica agreement to
dispose of one-sixth of the I M F gold?
Answer. The U.S. favored the establishment of the Trust Fund on the basis
that it would help to meet two long-held U.S. objectives. First, it facilitated an
orderly balance of payments adjustment process, by providing badly needed
balance of payments financing for the poorest developing countries at a time
when .those countries were faced with particularly severe needs resulting from
the sharp increase in oil prices, severe world inflation and deep recession. Second, it promoted iii a meaningful way phasing down the role of gold i n the
monetary system by transferring gold from monetary reserves to private hands
through the sale of gold for usable currencies.




160
The U.S. did not initiate proposals for "restitution" of gold to members, but
accepted a compromise in which l / 6 t h of the IMF's gold would be sold through
the Trust Fund and l / 6 t h sold to members for "restitution". From the point
of view of a large number of I M F members, "restitution" has the disadvantage
that it takes an asset owned by the IMF—gold—and uses it in a way that an
overwhelming share of the benefit—the profits on such I M F gold sales—accrues
to a small number of the large industrial countries.
Question. Would you explain the rationale behind the recent procedure change
in the I M F gold auctions?
Answer. Since opinions among the 128 I M F member countries differed on the
technical question of what is the best procedure to be followed in I M F gold
auctions, and there is little empirical evidence available as a guide, it has been
agreed that there should be some experimentation with alternative techniques.
Thus the first two gold auctions utilized the procedure of "common price"—
that is, all successful bidders received gold at the lowest price accepted from
any such bidder. The third auction will utilize the procedure of "bid price"—
that is, each bidder will pay the particular price lie bids and will not receive gold
at a common price. With experience it may be possible to reach a consensus as
to whether one procedure or the other yields the best return.
Question. Mr. Aliber addressed the question of the instability in world gold
markets. He said, "It is extremely important to many countries. Many of these
countries are friends and allies. No U.S. interest is served by the large instability that we have had in the gold market. No great costs would be imposed
on the United States in participating (in) arrangements in limiting gold price
movements." Would you address this question, and would you comment on the
U.S. position on any delay in the I M F gold auctions to allow the price to
stabilize?
Answer. The United States has agreed with the other members of the Group
of Ten that "there be no action to peg tlie price of gold." Pegging the price would
be contrary to the agreed decision to phase down the international monetary
role of gold. I n the proposed amendment of the I M F Articles, both the Fund
and members agreed "to avoid the management of the price, or the establishment of a fixed price" of gold.
I t would be noted that the U.S. has 110 objectives with respect to the price
of gold, and has not sought to depress the price or introduce instability into the
gold market. The aim of the U.S. and of the I M F is to dispose of the agreed
amounts of I M F gold in an orderly manner. The best way of accomplishing that
objective is in our view to provide for regularly-scheduled auctions of moderate
size. I n that way, the market will know what to expect and can accommodate
itself to the I M F sales. On some occasions the price received by the I M F may
be relatively high and on other occasions relatively low, but over the whole
four year period the Fund will receive a fair price as determined by the market.
I n our view, to introduce uncertainty into this market by arrangements under
which the I M F might delay, accelerate or change the scheduled auctions would
be a destabilizing factor and would hurt rather than help the gold market.
Question. Would the Treasury Department favor a set date to restore the
freedom of Americans to use gold clause contracts? Would the Treasury favor
an amendment of this kind on the I M F legislation?
Answer. As Secretary Simon stated in his letter to you on May 6, the Gold
Clause Joint Resolution, by making unenforceable contract provisions for the
payment of the obligation in gold or in an amount of dollars measured in gold,
helps to assure that gold will not again assume a monetary role through widespread use in private transactions. Secretary Simon, at that time, also expressed concern that the emergence of gold clauses which might result from
repeal of the Joint Resolution, could call into question the strength of the
dollar and undermine our efforts to control inflation and maintain confidence
in our currency. For these reasons, the Joint Resolution appears to us to have
a substantial and important rationale and its repeal at this time would be
unwise.
I n our view, careful and thoughtful consideration should be given to the
bill you introduced 011 June 14 to repeal the Gold Clause Resolution. However,
because of its importance and our concerns regarding its repeal, it should not
be handed hastily in the context of the Bretton Woods legislation. Rather, the
Gold Clause Resolution can and should be considered on its merits. At an appropriate time, officials from this Department would be happy to participate in




161
full, frank, and open discussions on this matter and to examine our concerns
in light of all the points of view expressed in those hearings.
Question. What is the purpose of the $2 billion loan authority requested in
the bill? How will Congress be notified of the time and reasons behind any
exercize of this authority ?
Answer. This question refers to the existing authority in present law for $2
billion which can be made available to the I M F under the General Arrangements to Borrow together with funds from othe I M F members for the purpose
of forestalling or coping with an impairment of the international monetary
system. This authority has existed for 14 years and no change in this authority
is proposed in the present legislation. The statutory change that appears in
H.R. 13955 is merely a technical change resulting from a renumbering of the
I M F Articles as they are proposed to be amended.
Any activation of the GAB and U.S. participation in such loans to the IMT*
would be announced publicly.
Question. Why does the bill call for I M F compensation to the U.S. representative, rather than U.S. compensation? What is the difference in benefit levels?
Answer. The I M F Articles as originally approved in the Bretton Woods Act
envisage that Executive Directors, while representing the governments appointing or electing them, would be I M F employees and paid by the Fund. The
Articles provide that the Board of Governors will determine the compensation
to be paid Executive Directors. The Articles also provide that Governors will
not be compensated by the IMF—other than meeting reasonable expenses for
attending annual meetings—since the position of Governor is not a full time
position. The provision in Section 2 of H.R. 13955 relating to salaries of U.S.
representatives to the I M F merely extends the present statutory provision (Section 3 of the Bretton Woods Agreements Act) to the U.S. councilor and alternate
should the I M F Council be established. The amended Articles do not provide
for remuneration being paid by the Fund to Councilors and alternates. (A comparison of I M F and U.S. Government compensation is covered in the response
to following question.)
Question. There has been some press attention to the salary levels of I M F
staff. Would you provide an analysis of this situation and a report on U.S. actions in this regard? How do I M F staff salaries differ from those of comparable
Federal Government employees ?
Answer. The I M F salaries (and those of other international institutions)
are generally higher than U.S. Civil Service salaries, and the gap at the more
senior levels has expanded during recent years when there has been a ceiling
on senior U.S. Civil Service salaries. The U.S. Government has been concerned
at the growth of salaries in the I M F and other international institutions, and
has made strong efforts aimed at restraining salary increases, with some success. I n 1975 the U.S. Government was successful in introducing tapering to
increases in these senior salaries. In 1976 a vigorous U.S.-led campaign caused
management's proposed increase in staff salaries to be defeated and a more
moderate one to be adopted. I n August 1976 another U.S.-led effort caused a
proposed increase in the salaries of the Executive Directors to be voted down
by a 2 to 1 margin. This is the second year in succession that proposed increases
in Executive Directors' salaries were defeated by a Governors' vote.
Question. Under the Percy amendment, or under present procedures, what
access is there to records of how the U.S. representative votes on various loans?
Are the votes of the U.S. representative always consistent with American policy
objectives as they apply to foreign aid programs ?
Answer. Under I M F procedures, votes on individual issues are not made public.
U.S. representatives are fully prepared to meet appropriate Congressional requests for information on U.S. votes. Inthe Executive Board, where decisions
on individual I M F transactions are made, the U.S. Executive Director is instructed by the U.S. Governor of the Fund (the Secretary of the Treasury),
with U.S. international financial and monetary policy coordinated by the National Advisory Council (NAC). The NAC, which includes in its membership the
Secretary of State, the Assistant to the President for Economic Affairs, the
Chairman of the Board of the Governors of the Federal Reserve System, and
officials of other appropriate agencies, provides a mechanism for assuring that
U.S. foreign policy and other considerations are taken into account in the determination of U.S. policy with respect to the I M F .
Question. International liquidity is at an extremely high level. Can you say
that additions to the . I M F quotas and the subsequent added loans I M F will




162
make will not be inflationary? Would you refer to the arguments made in
Mr. Robert Heller's article in the " I M F Staff Papers" of March 1976?
Answer. I M F quotas differ in character from other forms of international
liquidity, in the I M F resources are available for conditional credit—that is, they
are associated with programs of adjustment designed to correct, rather than
add to, inflation and other economic problems. Moreover, the proposed increase
in I M F quotas, at 44.6%, only partially makes up for the decline in the size
of quotas relative to levels of international trade. Since 1970, when the last
general incerase in I M F quotas occurred, world trade has almost tripled. Mr.
Heller's article analyzes the effects of increases in unconditional liquidity on
world inflation.
Question. Congressman Paul expressed concern with the newly established
Executive Council. Would you comment on the points he raised? Would you
comment on the powers and responsibilities of this new body?
Answer. Concerns about possible establishment of a permanent I M F Council
are not warranted. This is an administrative matter that is completely internal
to the I M F . I t does not involve an expansion of the IMF's powers—it does not
mean a "supra-national Fed"—and it does not involve any diminution of the
U.S. voice in the I M F . The Council, if established, would succeed the present
I M F Interim Committee. The only difference is that it would have formal decision-making powers, to the extent the I M F Board of Governors chooses to
delegate such powers to the Council, in contrast to the Interim Committee's
advisory role. The experience of the past few years has indicated that it may
be desirable to have a decision-making body in the I M F that involves senior
policy officials from member governments, but which is more streamlined and
manageable than the 128-member Board of Governors.
All important powers in the I M F are vested in the Board of Governors. The
Board of Governors will be able to retain those powers, delegate certain powers
to the Executive Board, as it does not, or to the Council, if that body is established. This is not an expansion of the I M F power but simply a question of
distribution of authority icithin the I M F . The Board of Governors would make
the decision to establish the Council—by an 85 percent majority vote—and
would decide on the distribution of authority as among the Board of Governors,
the Council, and the Executive Board.
The U.S. representative on the Council would be the Secretary of the Treasury,
who is U.S. Governor of the Fund. Other countries would be represented at
a comparable level. The U.S. vote would be precisely the same in the Council as
it is in the Board of Governors and the Executive Board, and the votes required
for various decisions are exactly the same. The fact that a question is decided
by one I M F body or another does not change the voting structure or the majorities required for decisions.
Provision in the amended Articles for possible establishment of the Council
is fully appropriate, involves an internal organizational matter, and fully protects the interests of the United States.
Question. Would you comment on what sort of measures the Fund would take
against nations that "manipulate" their currencies? Would you define "manipulation?" I realize that this may be difficult, but does not the definition of
this term determine the nature of one of the most important aspects of this
legislation?
Answer. I n the proposed amended Articles, each member country undertakes
an obligation "to avoid manipulating exchange rates in order to prevent effective
balance of payments adjustment or to gain an unfair competitive advantage."
A finding that a country was in fact engaged in such a manipulative practice
would be made in light of all the circumstances of the case—a judgment that
the country was through its practices preventing adjustment or gaining an unfair advantage. I t would be a mistake to try to define such situations in advance. Case history and experience will need to be developed in the I M F as a
basis for determining whether this obligation is being fulfilled.
Question. Mr. Sidney Brown commented on the need to postpone passage of this
legislation. Would you comment on what real changes might result in the international economic situation if the U.S. doesn't hurriedly pass this bill?
Answer. The international monetary system is presently operating outside
the law. I t is important that we correct that situation, and restore a legal framework for international monetary cooperation and for encouraging countries
to operate in an internationally responsible manner.




163
The process of ratification of amendments is a complicated one—60 percent
of I M F member countries with 80 percent of the total vote must approve the
amendments—and it may take 12-1N months even if the United States acts
promptly. The United States played a leading role in the negotiations, and many
nations await U.S. action before pressing ahead with their own legislative
processes. I f the United States does not enact the legislation in the present
session, the whole proces gets pushed back a year—and the amended Articles,
and the needed quota increase, would not become effctive for a long time. This
would be contrary to fulfillment of U.S. objectives in the international monetary
area and would be inconsistent with the posture of the United States—as formally
expressed by Congress in 1973—to expedite realization of the much-needed
reforms.




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