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For Release on Delivery
{Approximately l-JO p.m.
Thursday, Aoril 4, 196G)
THE QUEST FOR AN INTERNATIONAL MONEY
Rem« rks by Governor J. Dewey Daane
Member, Board of Governors of the Feder'1 Reserve System
Before The New York Society of Security Analysts
Intern« tion«: 1 Monetrry Seminar
New York, New York
on Thursday, Anril 4, 1^68
THE QUEST FOR AN INTERNATIONAL MONEY
In recent weeks and months, I have had the feeling that those of us
engaged in the central banking business have been living under that old
Chinese curse which translates roughly as "may you h:ve an interesting life11!
Most recently, and this last weekend in particular, the word "interesting"
seems to me a me sterpiece of understatement in describing the sense of
excitement, frustration, and accomplishment accompanying our quest for ways
and means of deliberately creating, for the first time, an international
money.
One remembers small sidelights to the larger issues; for instance,
come demonstrators in Stockholm, the general theme of whose placards seemed
to be "SDR's go home"!
There were, quite understandably, bad moments as well
as good but the Ministers and Central Bank Governors ended up in such a way
as to make even more meaningful today the topic "The Quest for an International
Money".
Not long ago, I was fortunate enough to see the musical show, "Man
of La Mancha" in which the song titled "The Quest", otherwise known as
"The Impossible Dream," is central to the theme of the play concerned with
Don Quixote's search for a seemingly unattainable goal.
During the past
several years in our almost monthly meetings in Europe in which we have been
searching for a new international money to supplement gold and doll-rs, there
has often been much of the same feeling of unreality and impossibility of
achievement.
But even more often there has been the feeling of working
closely with our counterparts from other countries in seeking to achieve a
real and constructive result.
The result of this search appeared, first, in the resolution adopted
unanimously by the Governors of the International Monetary Fund at their
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meeting in Rio de Janeiro last Ser>tember--a resolution with the rather
cumbersome title, ”Ectrblishment of r Facility Based on Special Drawing
Pvights in the Fund rnd Modifications in the Rules and Practices of the
Fund11.
It appeared in more full dress in the Proposed Amendment to the
Articles of Agreement of the IMF, drawn up in accordance with the Rio
Resolution and endorsed in lact week's Stockholm Communique of the
Ministerial Meeting of the Group of Ten.
By now it stands as a very real
milestone in the evolution of the international monetary system.
Instead
of taking a major step backward in the evolution of that system, which is
what a change in the price of gold would represent, the 197 countries com
prising the International Monetary Fund, with perhaps one exception, have
moved forward into the final stage in putting into place a mechanism en
abling the deliberate creation for the first time of an international money,
which will assure the continuity of the present price of gold as the anchor
stone for all national currencies.
That is to say, because additions to
SDR's will in the future take the place of those additions to reserves which
might have in earlier years been provided by gold, we are no longer dependent
on gold as a source of monetary reserves.
On this score I think it partic
ularly significant that the Governors of the Central Banks of the active
gold pool contributing countries, at their historic mid-March meeting in
Washington, noted that :,as the existing supply of gold is sufficient in
view of the prospective establishment of the facility for Special Drawing
Rights they no longer feel it necessary to buy gold from the market1'.
Resolutions and Communiques, especially those with long and involved
titles, seldom sound very exhilarating.
But I can assure you that the Rio
and Stockholm documents represent decisions of enormous significance not
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only to everyone in this room but to the financial end industrial communities
throughout the x^orld.
The operative parts of these decisions, so far cs
our search for an international money is concerned, were in the Rio cell
upon the IMF Executive Directors to propose Amendments to the IMF Articles
for the establishment in the Fund of a new facility to meet the need, as
and when it arises, for a supplement to existing reserve assets, and in
the Stockholm authorization to the IMF Executive Directors of nine leading
countries enabling them, in cooperation with the Executive Directors of other
countries, to complete shortly the final draft of the proposed Amendment,
In all the turmoil of recent developments, what do the abstruse
sounding words of the Rio resolution and the Proposed Amendment endorsed
in the Stockholm communique portend for the functioning of the international
monetary system?
First of all, and related directly to my topic today, I am in the
fortunate position of being able to report positive results from our quest
for an international money.
As President Johnson said on Sunday night,
in calling the attention of the American people to the outcome of the
monetary conference in Stockholm, "the major industrial countries took a
big step toward creating a new international monetary asset that will
strengthen the international monetary system."
In what way will this represent a strengthening of the system?
Here
I think it is necessary both to look backward at the why of our search for
an international money and to look forward to the relationship of the
product of that search to the future functioning of the system.
Looking first at the "why the search" question, the answer is re
latively simple--it is because as we look to the years and decades ahead
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it is clear there will not be enough of the existing kinds of reserve
assets to go around.
An expanding world econon^ requires an expanding
supply of reserves, that is, an increasing supply of the kinds of money
that monetary authorities use to settle claims reflecting deficits or
surpluses in their overall balance of payments.
The world needs the
assurance that the traditional reserve assets, gold and reserve currencies,
can and will be supplemented by a new reserve asset added at a controlled
rate sufficient to meet future requirements.
Events in the London gold
market leading to the setting up of a two-market system for gold— with
monetary gold in a closed circuit and gold outside given a commodity status-illustrated dramatically how the absence of such assurance can lead to a
breakout of speculative fever.
With gold coming into increasing use as a
commodity, and with hoarding demand stimulated by the belief that gold would
soon become so scarce its price would have to rise, there was an enormous
drain of gold from monetary reserves into an array of private uses.
That
is why another alternate reserve asset, universally acceptable, had clecrly
become necessary--though caution would be required in any new arrangements
to assure that there would not be more of the new asset created than the
justifiable need of world payments could absorb.
Just as there is the risk
of over-issue of domestic currency in the case of any single national economy,
so there is a risk on the international scene that the supply of international
reserves could expand too rapidly.
But there is the opposite and equally
serious risk, and certainly the most relevant one as we look ahead, that
reserves
Jill expand too slowly.
their reserves over time.
All countries clearly want increases in
Yet unless the total supply of reserves increases,
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any one country can increase its reserves only by bidding them away from
another.
Hence there is the danger, pointed out by so many observers of
the international financial scene, that countries would struggle against
each other for increasing shares of a relatively constant total of reserves,
with the highly undesirable result that restrictive external policies and
deflationary domestic policies would reduce growth of world trade and the
world economy.
To make this a little clearer, let me give you some rough figures.
During the oast decade, the increase in world reserves has averaged close
to $2 billion a year.
If one excludes the United States, which has ex
perienced a substantial decline in reserves, reserve growth of the rest of
the world has averaged nearer to $3 billion a year.
But analysis of trends
in the principal components of that reserve growth point to the likelihood
of future difficulties.
Taking newly mined gold first, there has been very little addition to
international reserves from this source in recent years--perhaps 200 to 330
million dollars a ye^r.
And, beginning in 1966, there was actually a net
drain from monetary reserves into nonmonetary uses--reflecting increased
industrial uses associated with space exploration, jewelry, etc., and,
especially in the last few months, heavy speculative demand.
So gold alone
does not seem to provide the answer to the need for growth in international
reserves as we look ahead.
The decisions of the Central Bank Governors at
Washington in mid-March further underscore the diminishing role and con
tribution of gold.
What about dollars--or about some other currency performing this
function?
Again, there are clear indications that growth in foreign official
balances alone, or even in combination with new gold, could not be expected
to meet these prospective needs.
For substantial growth of dollar holdings
abroad requires continued overly large deficits in the U. S. balance of
payments to provide such
pn
outflou.
Yet, such deficits are clearly un
desirable, for they can only serve to werken the strength of the dollar
and lead more and more to an unwillingness of foreign monetary authorities
to rccept, or at least to hold, such dollars in their reserves.
The why
of our search, therefore, is the strong evidence that the supply of reserves
from traditional sources--mainly gold and dollars--would not meet growing
needs.
As for any other national currency filling the breach, apart from the
special role of sterling, all major countries have made clear their un
currency
willingness and inability to accept the burdens of a reserve/country. Thus
it has been only prudent to look elsewhere, and that prudent look--sometimes
c lied ’’contingency planning” for reserve asset creation--led directly to
the Rio agreement last fall, to the subsequent painstaking work by the IMF
Executive Directors to implement it, and to the Stockholm decisions last
weekend.
Against this background of a brief look at the ”why” of our search for
an international money, the crucial question to be ¿nswered is whether the
new asset incorporated in the SDR facility meets the demonstrable need for
a new reserve asset to accommodate a secular growth in reserves.
An
unequivocal affirmative answer can be given to this question.
As I have already indicated, the IMF Governors at Rio approved an Outline
of a Facility based on Special Drawing Rights in the Fund.
to that Outline stated:
The introduction
”The facility described in this outline is intended
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to meet the need as and when it arises, for a supplement to existing reserve
assets.”
These same words reappear in the first article of the Proposed
Amendment to the IMF Articles, as endorsed at Stockholm, covering the
allocation of special drawing rights.
Without attempting to cover all of
the details as to the nature of the agreed facility for reserve asset creation,
some of the key features are as follows:
First, this supplementary reserve asset takes the form of Special Drawing
Rights that are set up in a separate and segregated account in the Inter
national Monetary Fund.
decisions.
This brief statement registers tx;o important
The accounts of the SDR facility are entirely segregated and use
o£ SDR will be clearly distinguished from the use of other resources in the
Fund, but the Special Drawing Rights will be set up as a part of the Inter
national Monetary Fund, by amendment of the Articles of the Fund.
Second, participation is offered to any member of the Fund which under
takes the obligations of the amendment.
That is, this is a universal scheme
that is not limited to a particular group of members of the Fund.
When
Special Drawing Rights are created, they will be allocated to all member
countries participating in the scheme in proportion to their IMF quotas.
Third, the new reserve asset will normally be created for a basic period
of five years at a time.
That is, it is designed to provide for the growth
in reserves over a considerable period of time, so that international
decisions, which are not likely to be taken easily, would normally need to
be made only at five-year intervals.
The IMF itself has had a provision for
quinquennial review of the adequacy of its regular resources.
Fourth, the procedures for taking a decision to create reserves are
spelled out rather carefully.
It is not surprising that this is the case
because, as I have indicated, the decision deliberately to create inter
national reserves is indeed something new and unique, and it is very
important that it be done in a responsible manner by collective judgment,
so that the world will have confidence that the new asset will be of the
highest quality.
To achieve this, the plan proposes that the IMF Managing Director
would normally initiate any proposal to activate the plan to bring about
the actual creation of a given quantity of Special Drawing Rights.
Before
doing so he would consult carefully to ascertain that there is broad
support among the participating countries.
His proposal would need the
concurrence of the Executive Directors, and then would be put to the
Governors of the Fund.
It would become effective only if 85 percent of the
weighted votes of the participating countries were in favor of the creation.
You are probably aware that this 85 percent majority requirement was
one of the crucial decisions reached in negotiation of the SDR facility.
It is no secret that it was strongly urged by the members of the European
Common Market, whose aggregate votes in the IMF are just over 15 percent.
In other words, this provision would mean that no decision to create Special
Drawing Rights could be passed if all of the Common Market countries were
to participate and unanimously to oppose the proposal.
The United States
resisted the 35 percent proposal, advancing among other arguments the
suggestion that the Common Market countries might appropriately increase
their quotas in the International Monetary Fund in order to bring their
weighted vote just beyond^O. percent, and retaining an 80 percent weighted
majority vote for application to the new facility.
ill *'
.
VJhen other aspects of
’
the SDR facility developed to our satisfaction, we agreed to the 85 percent
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provision, recognizing that as a practical matter the new facility could
not operate in the face of opposition on the part of all of the Common Market
countries acting together.
While French abstention from participation x/ould
mean that the G5 percent provision no longer provided the other Common Market
countries with a veto, the practical need for the participation of these
other countries would remain.
Fifth, and most important of all, what about the quality and usefulness
of the new asset?
As to the quality of the Special Drawing Right as a new
asset, it will be unimpeachable.
It will consist of a firm, unequivocal
and solemn obligation on the part of the participants to accept the new asset
when it is presented and to pay currency in exchange.
That obligation is the
fundamentrl assurance of the useability of the asset and is the principal
factor which will ensure its value.
Each participant will be obligated to
accept Special Drawing Rights up to an amount equal to its cumulative
allocations, plus tx/o times its cumulative allocations:
three times the initial allocations.
in other words,
As I mentioned earlier, allocations
x;ill be made to participants in proportion to their IMF quotas.
This
results in a margin betx;een amounts created and acceptance obligations wide
enough to assure that any country wishing to use its holdings of Specirl
Drax-zing Rights will be able to do so without question.
At the same time the
existence of specified acceptance obligations assures each participant that
it is not undertaking an unlimited commitment.
As to use of the nextf asset, one way to visualize this is to conceive
of it being used in a fashion similar to the use of gold but x/ith the IMF
acting as a kind of traffic director, at times guiding the floxz of Special
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Drawing Rights ?s they are transferred from one country to another.
Finally,
there are rules and regulations governing the reconstitution (or restoration
of holdings) by countries, in order to avoid a situation in which some
countries might pay out (i.e. use) the entire amount of the SDR's that they
have been allocated, and then leave them outstanding with other members
indefinitely.
If they did not reconstitute at least a part of the initial
allocation they would be using them improperly as a means of deficit financing.
The essence of this provision, as it applies for the first five years, is
that countries should on the average retain over a five-year period at
least 30 percent of their average allocation.
There will be a review
of these rules in the light of experience, but they cannot be changed
for the future without an G5 percent majority.
These reconstitution rules, along with the procedures for decision
making, required very intense negotiations up to the Rio approval of the
Outline Plan.
Existing reserves of gold and foreign exchange may, of
course, be spent by any country without any formal requirement that they
be reconstituted.
In their own interest, countries will normally wish
to reconstitute their reserves after a period of temporary strain.
of us, therefore, felt that no formal reconstitution requirement was
necessary.
Some
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On the other hand, the institutional reserves which have developed
in the past in the International Monetary Fund in the form of claims on
the Fund have been subject in part to repurchase obligations.
It was
urged by some European countries that there was a need to apply some plan
of reconstitution to the new CDR.
The resolution of this question is set
forth in the Outline Plan and incorpore ted in the Proposed Amendment.
The essential operating rule in effect allows a country to make its own
decision regarding; the timing of reconstitution of 70 percent of its
allocation, but establishes the principle that on the average over a
period of years at least 33 percent of any given country's allocation of
the new asset should be held.
There is also a general statement of a
broader obligation to "pay due regard to the desirablility of pursuing over
time a balanced relationship between their holdings of Special Drawing
Rights and other reserves."
It is our view that under these provisions,
it is quite appropriate for countries to consider all of their holdings of
Special Drawing Rights re reserves.
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The United States,
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n turn, will be able, subject to the general
test of need, to use its Special Drawing Rights to acquire dollars
from any other country agreeing to such a transaction,
And we will
be able to acquire foreign currencies under the Fund's rules of
guidance.
We would expect to retain over time a rising total of the
new reserve assets in our reserves.
The reconstitution feature sug
gests that these holdings averaged over time should be at least 30 per
cent of our allocations.
While in our own opinion, we would have been
prepared tp place a greater measure of responsibility on individual
countries for management of their own reserves rather than apply such
a specific reconstitution rule, we are satisfied that the rule that
has been adopted is reasonable and can be made to work.
our hope that over time, as
It would be
experience accumulates, it will be found
unnecessary to place great emphasis on reconstitution rules.
The Stockholm agreement, building on the Rio resolution and all
of the subsequent work of the IMF Executive Directors, is another
landmark in the search for a new reserve asset to strengthen the inter
national monetary system in the interest of the entire free world.
By
the time of the meeting last weekend at Stockholm the issues in the
construction of the necessary machinery to provide a new reserve asset,
and in a reform of the existing machinery of the International
Fund, (a report on which had also been called for in Rio), had become
inextricably linked in the negotiations.
Roughly speaking, there were six issues remaining, largely
technical, with respect to the SDR facility and another six issues,
also largely technical, with respect to the so-called Reform of the IMF.
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In the latter case, three of the most technical issues were referred
back to the IMF Executive Directors for resolution,
Two of the other
issues involved voting majorities; for increases in quotas and for
changes in uniform par values and maintenance of value.
Adoption of
an 85% voting requirements for quota increases--despite objections
raised prior to Stockholm by Executive Directors of countries outside
the Group of Ten, objections which the U. S. shared and voiced at the
meeting--was part of the package advanced strongly by the EEC countries;
the 85% voting requirement for uniform par values and related main
tenance of value simply strengthens existing procedures protecting
against any change in gold price or related consequence to Fund
liquidity.
The final IMF Reform question involved a suggested appeal
procedure for interpretations of the Fund Agreement; this was satis
factorily resolved by a procedure within the IMF whereby a Committee
of Fund Governors, or their temporary Alternates, will serve as an
initial appeal board subject to reversal by an 35%, vote of Fund Governors,
On the SDR itself the principal issue was that of "opting out,"
specifically whether a member country could become a participant in
the scheme but not join in the first "activation11 or creation of
assets when it had been decided by an 85% majority.
All countries
finally agreed to grant this concession, designed to encourage French
acceptance, which permits a country voting against an activation to
opt out of any receipt of assets and subsequently, with majority
approval, to opt back in again.
Other issues were similarly settled;
provisions governing Other Holders, Other Transactions, and Transactions
with IMF General Account.
The special considerations relating to
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initial activation are now essentially identical with those in the
Group of Ten's Hague Communique of July 1966, namely, a collective
judgment that there is a global need to supplement reserves, and the
attainment of a better balance of payments equilibrium as well as the
likelihood of a better working of the adjustment process in the future.
As to where we go from here in implementing the Rio and Stockholm
agreements procedurally, the next step--already under way--is for the
IMF Executive Directors to complete the final draft of the proposed
Amendment to the Articles of the IMF and to transmit it to the Fund's
Board of Governors for approval.
After this approval, which may take
a month or so, the Amendment will be submitted to individual country's
Parliaments and legislatures for ratification.
The Amendment to the Articles will enter into force only after
it has been ratified by a weighted majority of 8)7* of the IMF membership
which must also comprise 3/5ths of the member countries.
Following this
so-called "entry into force1' stage of the SDR facility, further time is
involved in the consultative processes leading up to a decision to acti
vate the facility.
The first activation--possibly sometime in 1969--
will represent the first actual deliberate creation of the new reserve
assets.
This br ngs me full circle in my remarks this noon.
I began by
stressing the historic significance of the Rio and Stockholm decisions,
and I would like to make a few concluding comments on that point*
What do these decisions really mean for the United States and for
the international monetary system?
To me, at least, they mean two very
important things. First of all, the countries which are members of the IMF
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are going to put into place machinery for creating a new reserve asset
that can function as a full supplement to existing reserve assets.
The
very act of agreeing to set up such machinery is a notable historic
event.
It is commonly and correctly realized, as I pointed out earlier,
that a desirable rate of growth of the total of world monetary reserves
cannot be achieved by increases in the supply of the kind of reserve
assets now in use.
Without such machinery in place for creating new
reserve assets as and when they are needed, therefore, the present
international monetary system would have been exposed to increasing,
perhaps even intolerable, strains.
The blueprint of the machinery agreed
on goes a long way toward preventing these strains and remedying this
problem.
The second thing the SDR facility signifies is the firm commitment
of the monetary authorities of major countries to continue to strengthen
international monetary cooperation*
in the Stockholm Communique.
This was again explicitly recognized
It strikingly illustrates the clear intent
of all these countries to build strongly and securely on the base of
our current international monetary system--including the present official
price of gold.
There has been no lack of gloomy prophets ready to pro
claim that the framework of international financial cooperation was some
day bound to break down and that the key features of the present system-the present fixed price of gold and a pattern of stable exchange rates-would someday have to be abandoned.
In recent months, these prophets
have been particularly vocal in inveighing against the $35 official
price of gold.
The manifest strength of international monetary coopera
tion--^ Rio, in Washington last month, and most recently in Stockholm--
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discredits the views of these prophets of doom and substantially re
inforces the international monetary system.
I do not want to leave you with the impression that all the hard
itfork on international financial problems is finished or that the blue
print for creating Special Drawing Rights provides a panacea for all
such problems.
This is patently not true.
I would also like to em
phasize that the creation of nextf reserve assets does not remove the
need for continued efforts to make the balance of payments adjustment
process xjork more smoothly.
This was recognized explicitly last month
in the Washington and Stockholm communiques.
The SDR facility in no
way alters the importance of further intensive efforts by the Dnited
States and by European surplus countries jointly to restore a reasonable
pattern of payments balance in their external accounts--other than,
perhaps, to make the price of failure even higher because failure to
reach equilibrium now on our part could jeopardize all that has been
achieved.
The establishment of machinery for the orderly and deliberate
creation of new reserve assets to supplement gold, reserve currencies,
and IMF reserve positions is indeed a necessary condition for a continued
healthy expansion of x^orld trade and commerce.
But, in my view, it
xtfould be seriously misleading to regard it as a sufficient condition.
We cannot, just because of the successful culmination of more than
four years of discussion and negotiations, look forx^ard to an era in
which international financial problems are absent.
On the other hand,
it would also be a mistake to minimize the importance of the agreement
to establish the SDR facility.
Evclution occuis in small steps which,
xtfhen viewed at the time, may not alxvays seem sufficiently radical to be
*
noteworthy.
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In retrospect, however, and seen in the full context of
subsequent developments, some evolutionary steps can turn out to be
tremendously important*
I firmly believe that future historians of
international financial affairs will look on the recent and prospec
tive agreement among the IMF Governors to create international money
in precisely this manner, as one of the significant milestones which
mark the progress of the world economy.
@FedFRASER