Smithsonian Institute Agreement

The problems associated with the Fund`s operations, referred to by Mr Schweitzer, have already been described in Chapters 12 and 17. In short, the Fund`s financial operations and operations have been hampered by three circumstances. First, the widespread expectation of a rise in the future price of gold and foreign currency RDS prompted members to reduce their debt to the Fund and avoid a decrease in their CSD stocks and reserve positions in the fund. Secondly, the exchange rates of almost all the currencies that the Fund would use for drawings, redemptions and other transactions under its regular procedures were not effectively maintained within the margins established in accordance with the articles or decisions of the Fund, and the decision on fluctuating currencies was applied only to the three currencies that were variable before 15 August. 1971. As a result, purchases and redemptions in the general account could not be made in the usual manner on the basis of agreed nominal values or provisionally agreed exchange rates and transactions in the special drawing account.1This, in the absence of agreed convertibility agreements, members might find it difficult to use the currencies they held in their reserves, but which could not be accepted by the Fund when acquiring other currencies necessary for their operations with the Fund. In addition, without agreement on the values to be used for currencies and gold, there was a problem with the valuation of the Fund`s assets. With the approval of the Board of Directors, the Managing Director sent a message to all The Fund`s Governors on 19 August. Recent developments, he said, have raised serious concerns, while creating an opportunity to strengthen the system.

If action was not taken immediately, there was a prospect of disorder and discrimination in monetary and trade relations, which would seriously disrupt trade and undermine the system that had rendered good services to the world and that had served as the basis for effective cooperation for a quarter of a century. It is likely that some approaches to change are unlikely to lead to positive results, even for a single country, let alone for the community of countries represented in the Fund as a whole, and he said it was extremely important that action be “rapid, collective and collaborative”. This action was the role of the Fund and the Fund was able to make a very important contribution to the creation of a better monetary system. It intended to insist that rapid progress be made in the agreement on appropriate exchange rates and other measures that would allow the monetary system to function effectively and sustainably again. At the afternoon meeting of the Board of Directors on 16 August, the Economic Adviser presented the Staff`s reflections on the relative exchange rates of the currencies of the major industrialized countries. He divided the topic into two parts: (1) the determination of the relative exchange rates of major currencies, a provision that affected the competitiveness of countries in international transactions and the relative value of reserves held in different currencies; and (2) the link between the exchange rate model and gold, a link determined by the indication of the price of gold against one of the participating currencies, probably the dollar. . . .