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International Liquidity Problems in the 1960s: The Examination of the Minutes of the Executive Board of the International Monetary Fund

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Book cover History of the IMF

Part of the book series: Studies in Economic History ((SEH))

Abstract

One of the features of the international monetary system after World War II has been the establishment of international financial organizations (Bretton Woods Institutions) as an integral part of the governance structure to manage the international monetary system. However, the views about the role of the international financial organizations, especially the International Monetary Fund (IMF), have been largely divided into two approaches.

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Notes

  1. 1.

    President Kennedy took an intense and sustained personal interest in the balance of payments (Odell 1982, p. 96). In May 1962, US Treasury Secretary Robert Roosa said at the International Monetary Conference in Rome that it was the time to examine the international monetary system of the future and proposed measures to strength the gold exchange standard system, such as credit arrangements between countries (Wilki 2012, p. 18). In addition, US Secretary of the Treasury Clarence Douglas Dillon also expressed in the Annual Meeting in 1963 that it was necessary to examine the long-term issues of the international monetary system.

  2. 2.

    The proposals from academia were directed mainly to the reduction of the dollar balance outstanding against the holdings of gold. These included (1) Harrod’s plan to reduce the outstanding balances of the pound sterling and the dollar and to abolish the fixed gold price, (2) Jacques Rueff’s proposal to make the Bretton Woods system approximate the gold standard, (3) the Composite Reserve Unit (CRU) plan to use as an equivalent of gold the composite reserve unit (CRU) received in exchange for the pool (deposit) of the major countries’ currencies. On the other hand, dollar standard theorists argued that since the US balance of payments deficit was a result of the dollar-denominated liquidity demand, U.S. deficits would not cause any problem (Eichengreen 1996, p. 114). Practitioners such as the Brookings Institution and four countries’ central bankers (those of the United States, West Germany, Switzerland, and Italy) had also presented reform proposals.

  3. 3.

    At the Bellagio Group conferences in 1964, the reform of international monetary system was sorted mainly into the problems of payments adjustment, liquidity and confidence (Machlup 1964; Bordo 1993, p. 50). At these conferences, 32 economists participated, who were most influential at that time. However, the issue of the relationship between economic development and the supply of international liquidity was avoided from a political point of view (Wilki 2012, p. 30).

  4. 4.

    Maxwell Stamp proposed the plan that securities exchangeable with convertible currencies the IMF held would be issued and such securities would be allocated to central banks (de Vries 1976, p. 19). Stamp’s plan was the first proposal that linked the creation of reserves with development finance for developing countries (Williamson 1973, p. 716).

  5. 5.

    Under conditions in which the foreign exchange activities of private commercial banks are the major suppliers of international liquidity, the vision of Triffin would not be realized unless the world’s central banks could put private foreign exchange banks under its umbrella. Triffin tried to find the optimal international liquidity by using the ratio of international liquidity reserves to imports (Williamson 1973, pp. 688–689). In this regard, his reform proposals had a problem when the ratio of international liquidity reserves to imports was decreasing as the international capital movements became increasingly active.

  6. 6.

    In particular, the US Treasury under the Kennedy administration supported Triffin’s theory (Odell 1982, p. 130). The Influence of Triffin theory to the US policy makers can be confirmed in the other literatures (Bergsten 1975, p. 210; Gowa 1983, p. 43; Nau 1990, p. 138).

  7. 7.

    Strange criticized the creation of SDR as the product of compromise putting off the essential problems such as the adjustment problem of balance of payments, and the roles of gold and dollar (Strange 1976, p. 258).

  8. 8.

    At the Annual Meeting of the previous year, the draft for expanding the functionality of the IMF proposed by the former Managing Director Jacobson has been approved. In spite of it, Schweitzer felt a sense of danger that the IMF might be excluded from the issue of international monetary reform. Therefore, 18 days was after being appointed the Managing Director, he remarked that there was a problem in how to proceed with the international liquidity problem (Wilki 2012, p. 21). Schweitzer was very popular in the IMF and won the support of the developing countries in particular. This helped to adjust the relationship between the IMF and the United States (ibid., p. 63).

  9. 9.

    IMF EBM/63/56, September 23, 1963, pp. 14–16.

  10. 10.

    IMF 1963, p. 29.

  11. 11.

    IMF EBM/63/58, October 16, 1963, p. 1.

  12. 12.

    IMF EBM/64/1, January 8, 1964.

  13. 13.

    IMF EBM/64/2, January 10, 1964, p. 19.

  14. 14.

    IMF EBM/64/22, April 22, 1964, pp. 17–18.

  15. 15.

    IMF EBM/64/32, June 17, 1964, p. 35.

  16. 16.

    IMF 1964a, pp. 30–39.

  17. 17.

    At the Annual Meeting, the Managing Director warned of a conflict between governors of developing countries and governors of the G10 (IMF 1964b, p. 200).

  18. 18.

    IMF EBM/65/1. January 6, 1965.

  19. 19.

    IMF EBM/65/9, February 19, 1965, pp. 6–11.

  20. 20.

    IMF EBM/65/12, March 10, 1965, pp. 7–12.

  21. 21.

    IMF EBM/65/25, May 12, 1965, pp. 24, 32–34.

  22. 22.

    France’s plan was a kind of composite reserve unit (CRU). In the plan, participating countries would receive the CRU in return for their currencies to contribute according to gold holdings, and the gold and the CRU would circulate in a fixed ratio. Mr. Ossola had early asked the IMF to examine a plan for a new international reserve. The third alternative plan included the Canadian plan to provide the deposit account and the mutual account plan proposed by British Chancellor of the Exchequer Reginald Molding (de Vries 1976, pp. 52, 59–60).

  23. 23.

    IMF 1965, pp. 30–31.

  24. 24.

    IMF EBM/65/60. November 10, 1965.

  25. 25.

    IMF EMB/65/66, pp. 3–4.

  26. 26.

    IMF EBM/65/66, December 22, 1965, pp. 23–24.

  27. 27.

    IMF EBM/65/66, December 22, 1965, p. 28.

  28. 28.

    IMF EBM/65/67, p. 7.

  29. 29.

    IMF EBM/65/67, p. 9.

  30. 30.

    ibid., p. 10.

  31. 31.

    The G10’s plan took over Edward Bernstein’s CRU plan. However, the decision-making problem that was lost in the CRU plan was introduced following the GAB by Roosa (de Vries 1976, p. 56).

  32. 32.

    IMF EBM/66/7, February 4, 1966, pp. 3–4, 4–5, 8–10.

  33. 33.

    IMF EBM/66/28, April 29, 1966, p. 5.

  34. 34.

    The Expert Group of UNCTAD announced in October 1965 a report that International Monetary reform should reflect the views of developing countries. For this report, Latin American countries expressed support, and the G31 warned that they would oppose a plan that would not include the comprehensiveness principle (Wilki 2012, p. 43).

  35. 35.

    IMF EBM/66/30, May 11, 1966, p. 3.

  36. 36.

    IMF EBM/66/33, pp. 4–5. Originally, this committee was conceived by the Managing Director and the IMF Secretariat, in order to break the bottleneck of Western Europe countries opposed to the new reserve creation by adding the five governors from Australia, India, Middle East, Africa, and Latin America to the governors of G10 countries (de Vries 1976, p. 67).

  37. 37.

    IMF EBM/66/33, pp. 5–6. In this period, the IMF staff considered that loan amount might be increased significantly if the new reserve creation would be unconditional on the drawer rights (ibid., pp. 48–49).

  38. 38.

    IMF EBM/66/33, pp. 7–9.

  39. 39.

    IMF EBM/66/45. June 27, 1966.

  40. 40.

    IMF EBM/66/55.

  41. 41.

    IMF EBM/66/65, August 1, 1966, pp. 8–9.

  42. 42.

    IMF EBM/66/74.

  43. 43.

    IMF EBM/66/79, September 7, 1966, p. 3.

  44. 44.

    IMF EBM/66/80, September 19, 1966, p. 4.

  45. 45.

    IMF EBM/66/84, October 19, 1966, p. 18. The Executive Board had informal meetings about the joint meetings and discussed various issues such as the purpose and the form of reserve creation (de Vries 1976, pp. 106–119). During this period, nine directors of developing countries had informal meetings called the G7 and tried to reconcile their opinions (ibid., p. 7).

  46. 46.

    It was a necessary condition of the G10 concessions that the United States shift to supporting the IMF plan. Traditionally, foreign monetary policy of the United States has been done on an ad hoc basis due to confrontations within the government. But, both president Kennedy and President Johnson expected SDRs to maintain the official price of gold (Wilki 2012, p. 145). In addition, the US Treasury, which had wanted to avoid balance of payments adjustments, supported the SDRs, as did the Federal Reserve Bank of New York, which had seen the role of SDRs in limited admitted SDR creation (ibid., pp. 122–123).

  47. 47.

    If the G10 plan would be forced to be implemented, there was a concern that the developing countries would create a regional settlement mechanism (de Vries 1976, p. 58). The Managing Director had thought that the new reserve currency would be difficult to creation without the agreement of the developing countries (ibid., p. 67).

  48. 48.

    IMF EBM/67/72. September 6, 1967.

  49. 49.

    IMF EBM/67/73. September 7, 1967.

  50. 50.

    IMF EBM/67/74. September 7, 1967.

  51. 51.

    The conflict was born between the U.S. Congress and the U. S. government. The U.S. Congress rejected the aggressive support for the SDR. On the other hand, the U.S. government supported the SDR. The SDR had the contradictory effects that it was likely to erode the status of the dollar while it might also alleviate the pressures of balance-of-payments adjustments (Wilki 2012, p. 83). However, the American financial community pressured the government in being afraid that the expansion of U.S. financial institutions in the Eurodollar market might deteriorate the international financial stability as well as increase the role of the dollar (ibid., p. 64).

  52. 52.

    IMF EBM/68/99, June 17, 1968.

  53. 53.

    IMF EBM/69/86, September 12, 1969, p. 6.

  54. 54.

    IMF EBM/70/108, December 7, 1970, p. 21. At the Annual Meeting in September 1970, 77 developing countries asked to reconsider the relationship between the development finance and the SDR (Reserve Bank of India 2005, p. 577).

  55. 55.

    IMF EBM/71/18, March 12, 1971.

  56. 56.

    IMF EBM/71/43, May 19, 1971, p. 17.

  57. 57.

    In a report released by the Economic and Social Committee of the International Union (ECOSOC) in 1952, the need to expand the funding resources of the IMF had already been recommended (Wilki 2012, p. 13).

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  1. Faculty of Political Science and Economics, Kokushikan University, 4-28-1, Setagaya, Tokyo, 154-8515, Japan

    Yasutoshi Noshita

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  1. Waseda University School of Commerce, Shinjuku-ku, Tokyo, Japan

    Kazuhiko Yago

  2. Seijo University Faculty of Economics, Setagaya-ku, Tokyo, Japan

    Yoshio Asai

  3. Otsuma Women's University School of Social Information Studies, Tama, Tokyo, Japan

    Masanao Itoh

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Noshita, Y. (2015). International Liquidity Problems in the 1960s: The Examination of the Minutes of the Executive Board of the International Monetary Fund. In: Yago, K., Asai, Y., Itoh, M. (eds) History of the IMF. Studies in Economic History. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55351-9_5

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