There have been growing fears that the usual sources of international reserves will not be adequate for the requirements of expanding world trade and payments. No doubt, there will continue to be argument as to how far the monetary crises of the past year or two are due to shortage or maldistribution of international reserves, or to failure on the part of debtor and creditor countries to make the right domestic policy adjustments in time. There can, however, be no denying that existing means of increasing international liquidity are limited and haphazard. The main sources at present are gold, the reserve currencies—sterling and the United States dollar—and member countries' quotas in the International Monetary Fund, which are the equivalent of their subscriptions to the Fund. Gold holds a key position because of the intrinsic value it has acquired and its universal acceptability. Whatever its advantages, it cannot be depended upon as a source of new international liquidity.
In 1966 and 1967 none of the newly-mined gold went into international reserves, as demand for industrial use and for hoarding absorbed the supply in both years. In fact, in 1967 and in the first quarter of 1968 a substantial amount of gold was transferred from official reserves into private hands, thus actually reducing the amount available to finance world trade and payments. Action to prevent this leakage was taken in March last by the termination of the London Gold Pool. Since then the price of non-monetary gold has been allowed to fluctuate. As a result of these developments the amount of gold placed on world markets in the past year has been small and the arrangements for the marketing of South African gold are a matter of dispute between that country and the major financial powers. For the present, at least, the amount of gold available to finance trade can be regarded as more or less frozen.
For several years the main sources of supply of increased international liquidity have been the deficits in the balance of payments of Great Britain and the United States, chiefly the latter. As Deputies are aware, Britain has taken various measures to reduce the deficits in her balance of payments and it is clear that balance of payments deficits in that country are not likely to continue to provide increased international liquidity. In the case of the dollar the United States authorities also have taken action to reduce the deficit in the balance of payments, with it appears, some success on the non-trade side. Ironic as it may seem, the achievement of a sound balance of payments position by the United States and Britain could lead to a major crisis in international trade and finance because of its effect in reducing the volume of international reserves.
To avert such a development, the International Monetary Fund has for a number of years past being carrying out an intensive examination of the international monetary mechanism to see how it might be improved. The main purpose was to find a way of creating additional reserve units which would be acceptable internationally. At the annual meeting of the Fund in September, 1967, a draft scheme was laid before the Board of Governors under which existing reserves would be supplemented by artificially created reserve units, called special drawing rights, to be administered by the Fund. The draft scheme was approved by the Governors and the Directors were instructed to prepare a detailed scheme. This has now been done in the form of the proposed amendment to the Fund's Articles of Agreement.
Under the new scheme, each country wishing to participate will be allocated special drawing rights independently of its external payments position and in proportion to its present quota in the Fund. Participation in the scheme is optional and will not affect members' other rights in the Fund. These drawing rights will be handled in a special account in the Fund separate from the organisation's existing accounts.
The proposed drawing rights will be additional to the Fund's existing arrangements for assisting member countries. The underlying concept is, however, different. At present members in balance of payments difficulties may draw temporarily on the resources of the Fund. These consist of the total of members' subscriptions or quotas, 25 per cent of which have been paid in gold and the balance in members' own currencies. A drawing is made by purchasing foreign exchange from the Fund in exchange for the member's own currency. There is a limit on outstanding drawings of 125 per cent of the quota. The first 25 per cent can be drawn automatically since it represents the gold portion of the subscription but thereafter the Fund exercises closer supervision and must be satisfied that effective measures are being taken to correct the imbalance.
Special drawing rights will not replace any portion of these existing rights. They will be created without any prior deposit of gold or currency and they will be used not by drawing on the Fund but by direct transfer between member countries.
If a country gets into balance of payments difficulties and wishes to use these rights, it will exchange them for an equivalent amount of another country's currency. The Fund will designate the participating country which will provide the currency, but the transaction can also be arranged directly between two countries. The borrowing country will use the foreign currency obtained to finance part of its balance of payments deficit. The scheme, in effect, is based on the obligation of participants to accept drawing rights from other members in exchange for an equal amount of convertible currency. Special drawing rights, therefore, will have the character of reserve assets. The intention is that countries will accept the new rights as an integral part of their currency reserves.
The rights will have a fixed value in terms of gold, this value being the equivalent of the present gold value of the United States dollar. Countries participating in the scheme will accept them on this condition and on the condition that they are exchangeable for their own currency on this basis. Thus, they will have many of the characteristics of gold—a guaranteed value, right of transferability and general acceptability. In practice, they will represent an effective supplement to the world's gold stocks available for monetary purposes and so to international liquidity.
To ensure that countries are not encouraged by the provision of these additional reserves to run excessive balance of payments deficits and to prevent their using their drawing rights to the full in order to shield their other reserves, borrowers will be required to hold permanently at least 30 per cent on average of drawing rights allocated to them. As a deficit country goes back into surplus and begins to accumulate reserves, it will be expected to build up its drawing rights and thus be in a position to help other countries in deficit.
At this stage, we can only guess at the practical effects of the scheme when brought into operation. Unofficially, it has been suggested that, in the first five years, the total amount of special drawing rights to be created would not exceed $10,000 million, that is the equivalent of 50 per cent of the total of members' quotas in the International Monetary Fund. This would be an average of about $2,000 million a year. Contrasted with total world reserves of $73,000 million, this would be only a modest increase in liquidity. On this basis we would become entitled to receive drawing rights amounting to $40 million or £16.7 million in the first five years. Our liability to provide convertible currency in exchange for drawing rights of other countries would be limited in the first five years to $80 million or £33.4 million—that is twice the allocation of drawing rights to us.
It will not be clear until the scheme is in operation for some time to what extent we will be called upon to meet our liability to provide convertible currency in exchange for other countries' drawing rights. The Fund in designating countries to provide currency will take into account the strength of the balance of payments and reserve positions of those countries. The objective over time will be to achieve a balanced distribution of special drawing rights among participants. It is probable that eventually we will be required to accept drawing rights from other members in exchange for currency, provided our balance of payments and reserve positions are satisfactory. As Irish currency is not used in international trade, it would probably be necessary to provide sterling. It is not anticipated that we would experience difficulty in complying with any request made to us. We, of course, would have exactly the same entitlement to use our own special drawing rights should the need arise.
There is as yet no firm indication of the likely date of introduction of the scheme. There are several procedural hurdles to be surmounted. First of all, the amendment to the Articles of Agreement must be accepted by three-fifths of the members, having 80 per cent of the voting power in the Fund. Progress to date has been slow. By the beginning of February 34 members out of the required 67, with 50.5 per cent of the votes had accepted it. Even when the scheme has been accepted, it cannot be initiated until members with 75 per cent of the quotas have deposited their instruments of participation. So far only 15 have done so. Finally, an 85 per cent majority will be required to bring the scheme into operation and settle the amount of rights to be created.
As Governor of the Fund for Ireland, I have supported the special drawing rights scheme and voted in favour of the proposed amendment. Member countries agreeing to the scheme are expected to make any necessary legislative and other provision to enable them to fulfil their obligations under it. As a nation, we are dependent to an exceptional degree on external trade for our prosperity. We can only lose from a contraction in the rate of growth of world trade and we have viewed with misgiving the tendency of the international monetary system to drift into a situation of recurrent crisis. The international payments mechanism must be made to work in the interests of the whole world. I see the proposals of the International Monetary Fund as a welcome effort to bring order into the situation, to free the world from the dangers stemming from doubtful or haphazard growth in reserves and to provide in the future for the deliberate, planned creation of reserves as and when needed. It is a cautious approach to the problem. The scheme has been criticised on various counts. For instance, many of the developing countries feel that the allocation of drawing rights should not be based on members' quotas in the Fund on the ground that this simply adds to the strong overall reserve positions of the advanced countries. Nevertheless, the scheme is a beginning and a welcome one and I believe we should support it for that reason.
In addition to providing for the introduction of the special drawing rights scheme the amendment to the Articles of Agreement of the Fund as set out in the Schedule to the Bill proposes certain other changes in the Fund's rules and practices. The main changes are:—
(1) formal confirmation of the right of a member country to draw automatically from the Fund up to the limit of its gold subscription— normally 25 per cent of the total subscription—and of the right to obtain automatic repayment of any portion of the subscription converted into currencies other than the country's own;
(2) a change of the voting rules to provide for an 85 per cent majority for fundamental decisions. Under the new rules the EEC countries, voting together, and the United States will have a veto. At present the United States have an effective veto and Britain has a veto to a limited extent;
(3) under existing arrangements a repayment obligation can be reduced or wiped out in a particular year if the Fund's holdings of the particular currency to be used for the repayment are deemed to be excessive. It is proposed to abolish this right with the effect that drawings from the Fund will be repaid more rapidly;
(4) it is proposed that interest be paid by the Fund at the rate of 1½ per cent per annum on any portion of a country's subscription in excess of 25 per cent made available to other countries in currencies other than a member's own currency. The interest rate may be varied by the Fund, by a simple majority, within the range one to two per cent. Payment of interest will be made in gold or in a member's own currency as determined by the Fund;
(5) it is also proposed that the final decision on questions of interpretation of the rules will in future rest with a standing committee of the Board of Governors unless the entire Board decides otherwise; the existing rules confine final interpretation to the whole Board.
The Bill provides that special drawing rights allocated to Ireland will be held by the Central Bank of Ireland and that that bank will be responsible for all transactions and operations involving drawing rights. Since drawing rights will have the characteristics of reserve assets, it is appropriate that they should be held by the Central Bank, which holds the country's main external reserves.
It is also proposed in the Bill to take power to transfer to the Central Bank by order certain functions under the 1957 Bretton Woods Agreements Act at present exercised by the Minister for Finance. These functions relate to the making of payments to and the receipt of moneys from the International Monetary Fund. Such transactions arise in relation to the payment of our subscription, the purchase of other currencies from the Fund in exchange for Irish currency and repurchases. These operations, therefore, would be more appropriate to the Central Bank than to the Exchequer. This is the position in several other countries. The change will also yield some simplification of administration. Under the present arrangements all payments to the Funds must be made out of the Central Fund and all receipts must be credited to it. In practice the money for payments is provided by the Central Bank against certificates of indebtedness issued by the Minister for Finance, which are held by the bank as domestic securities in its legal tender note fund.
The Bill also provides for the vesting in the Central Bank of the asset represented by our gold subscription to the Fund and foreign currency made available to other countries under our obligations to the Fund. This asset will be credited by the bank against an equal amount of the Government's indebtedness to the bank in respect of advances made for payments to the Fund.
The effect of these arrangements will be that the Central Bank will have direct control over all the external reserves of the State, apart from the sterling holdings of the commercial banks. The House will be aware, in this connection, that as a result of the agreement with Great Britain on the application of the Basle arrangements to our sterling holdings, a substantial amount of the Associated Banks' sterling assets—£40 million—was deposited with the Central Bank in November last. The Central Bank's custody and control of the external reserves is, therefore, becoming much more complete than it has been in the past.
It is provided that the order transferring functions or vesting the assets in the Central Bank will come into operation on a day to be fixed with the agreement of the Central Bank. This is to ensure that the transfer will take place only at a mutually convenient and opportune time. I recommend the Bill for the approval of the House.
