Turning-point
FINANCE IMF WILLIAM JANEWAY
Washington—The underlying theme of the 1968 Annual Meeting of the International Monetary Fund was stated explicitly and succinctly, before the meeting began, by an institution which has come to enjoy unique status among those concerned with international financial problems and prospects. The subcom- mittee on International Exchange and Pay- ments of the Joint Economic Committee of Congress has become perhaps the most forward looking and open forum for debate on needed monetary reform : its educational impact, not least within the us. Congress, is remarkable. Under the chairmanship of Representative Henry S. Reuss, the subcommittee produced a report on 'Next Steps in International Mone- tary Reform' on the eve of the meeting. The thrust of the report was contained in the state- ment: 'Thus, while the liquidity problem may be on the way to solution, the more immediate and critical problems of adjustment and con- fidence remain unsolved.'
Ways to improve the mechanism for adjusting imbalances in international payments and to guarantee the worth of existing international reserves were not, in fact, on the agenda of the Meeting. What was on the agenda as item number one was the agreement to create Special Drawing Rights in the IMF as the chosen way to increase the amount of international reserves as needed—that is, to solve the liquidity problem. There is now little doubt that within a year or two at most SDRS will be available to meet increasing reserve needs if and when the dollar deficits—far and away the biggest source of new international money—dry up.
In themselves, Special Drawing Rights do not embody the road to monetary utopia, or anything like it. Their creation is conditional and subject to a veto by nations holding only 15 per cent of the voting power in the IMF (that is, by Common Market countries). Furthermore, the amount of SDRS contem- plated is small, no more than one or two billion dollars per year. Above all, they do nothing to solve the adjustment and confidence problems. But their importance does not lie merely in the fact that they show that the finan- cial powers can agree on at least one new depar- ture ture in managing the world's monetary affairs. Their prime importance is that the creation of SDRS significantly expands the functions of the IMF; this is the first step in transforming the IMF —in a phrase that has become fashionable —from a fire brigade into a world central bank.
Behind the formal speeches and official re- ceptions, one subject dominated the conversa- tion of delegates, observers and experts. The subject was the need to formalise and stabilise the role of gold in the international economy.
The immediate problem is how to maintain the delicate balance between the private gold price in London and the official gold price of 35 dollars an ounce. Specifically, what is re- quired is an organised method of channelling newly-mined South African gold on to the private market so that any speculative breakout on the private market will not lead to massive conversions of dollars into pounds and a general liquidation of monetary assets such as was threatened during the gold crisis last March. A long step towards solution of the immediate problem was taken at the IMF meet- ing in the proposal which was put to South Africa by the major financial nations (exclud- ing France who, in any case, will not be in a position to cause trouble by buying new or old gold for some little time). The proposal was that, if and when the private gold price should fall to 35 dollars and South Africa should be herself in balance of payments deficit, the IMF would act to protect the value of existing gold reserves by discretionary purchases of new South African gold.
The proposal put to South Africa also points to the sort of solution needed for the longer- term problem of the role of gold. Official and expert opinion is now crystallising around the creation in the IMF of a 'Gold Conversion Account.' Official gold holders could deposit their holdings in return for sons or other IMF reserve assets—at a guaranteed value of 35 dollars an ounce. A Gold Conversion Account in the IMF would mean that the present value of gold reserves would be protected whatever happened on the private gold market and, at the same time, it would provide the historic means for accomplishing internationally the concentration of reserves which the emergence of national central banks as sole holders of monetary gold has done domestically in vir- tually every nation in the world. Creation of a Gold Conversion Account—that is, substitu- tion of IMF reserve assets for gold as the basis of the international monetary system—would mean the orderly and effective demonetisation of gold, without liquidation of existing assets and without the threat of us political control.
In addition, an IMF Conversion Account for gold points the way to ultimate solutions for the other main threat to world monetary stability: the dollar and sterling balances held by foreigners. The Basle Agreement has al- ready stabilised the sterling balances. But long- term elimination of the instability inherent in the use of national currencies as international reserves awaits the full internationalisation of world monetary responsibility assumed for out- moded historical reasons by Britain and the United States. Conversion Accounts in the IMF have emerged as the likely chosen instrument.
The consensus voiced for immediate mobili- sation of sons on a stand-by basis was the lead- ing official outcome of the 1968 annual meeting of the IMF. But the lessons of the last few years have begun at length to be learned. As em- phasised in this column one month ago, increasing the amount of international reserves is a useless exercise if existing reserves are in the meantime being liquidated. The confidence problem, and IMF Conversion Accounts as its solution, are now, if only informally, on the agenda of the world's monetary authorities. And effective steps in the direction of the inter- nationalising monetary responsibilities may finally clear the way for solution of the /Trost important aspect of the adjustment problem :
the inability of the United States to manage its balance of payments without either starving the world for reserves or undermining con- fidence in the world's dollar reserves.
The monetary millennium is still a long way off. And it may be indefinitely postponed if the Nixon administration lacks understand- ing and initiative. But the 1968 IMF meeting marks a turning-point. The `Next Steps' are finally being contemplated. On international monetary problems, we may all be becoming Keynesians and Triffinites now.
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