I move: "That the Bill be now read a Second Time."
The main purpose of the Bill is to approve the Government's acceptance of the second amendment to the articles of agreement of the International Monetary Fund, the text of which is set out in the Schedule to the Bill, and to make the necessary changes in the previous Bretton Woods Agreement Acts arising from this second amendment. The Bill also authorises the Central Bank to make certain payments to the IMF.
The proposals incorporated in the second amendment to the IMF articles provide for a major reform of the international monetary system—the most important revision of these arrangements since the par value system based on fixed exchange rates was established at Bretton Woods in 1944. The need for reform became apparent during the sixties and assumed a new urgency with the breakdown of the par value system in the early seventies. The major world currencies then gradually abandoned the fixed exchange rate regime, which constituted the central element of the international monetary system, and we have since experienced a period of widespread floating of currencies in contravention of the existing IMF articles of agreement. The breakdown of the Bretton Woods system led to a major reappraisal of international monetary relationships in the light of the changed economic realities of the seventies. Five years of debate and negotiation within the IMF have produced a consensus on major adaptations to the international monetary system, particularly designed to provide for the greater flexibility which today's monetary relationships require.
An explanatory memorandum has been circulated along with the Bill for the information of Deputies. This memorandum sets out the main themes of the proposed amendment of the IMF articles. While the mechanics of the proposed new international monetary system may be fundamentally different from the old, the objectives towards which they strive remain unchanged, namely the fostering of international monetary co-operation through the medium of the IMF; the promotion of the balanced growth of trade; the elimination of financial barriers to trade; exchange stability; and the provision of financial assistance to countries with balance of payments difficulties to allow them the opportunity of correcting maladjustments without resorting to measures destructive of national or international prosperity.
By far the most important area of change in the new international system concerns the exchange rate arrangements which countries may adopt. The Bretton Woods system, envisaged international monetary stability as being based on a system of fixed though adjustable exchange rates supported, when necessary, by IMF assistance. Adherence to this fixed exchange-rate regime encouraged members to adopt stable economic policies and facilitated the unprecedented expansion in world trade of the post-war years. But inevitable divergences between national trends in growth and inflation made the rigid structure established in 1944 increasingly obsolete. These developments accelerated during the sixties and early seventies, which were characterised by faster growth in the volume of world trade and also by external shocks of unprecedented magnitude. The suspension of the convertibility of the US dollar in 1971, which heralded the collapse of the Bretton Woods system, was thus inevitable.
The new system takes a radically different approach from Bretton Woods. Now each country will be free to adopt the exchange rate arrangement of its own choice. This approach recognises that countries' competitiveness is subject to change and that it is much less destabilising to permit exchange rate flexibility in response to market forces than to attempt to adhere to a fixed exchange rate until its abandonment is forced after costly financing. The IMF, however, is conscious of the potential instability that could result from undue reliance by countries on the exchange rate flexibility which the new system allows. Accordingly an obligation is imposed on member countries of the IMF to collaborate with the IMF and other members "to assure orderly exchange arrangements and to promote a stable system of exchange rates". In particular each member will be required "to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability" and must "seek to promote stability by fostering orderly underlying economic and financial conditions". The emphasis therefore of the new system is on developing stability from within through attention to responsible management of underlying economic and financial policies in individual member countries.
To ensure the effective operation of the new system, the IMF will "exercise firm surveillance over the exchange rate policies of members" and "will adopt specific principles for the guidance of all members with respect to those policies". These principles and related procedures are at present being worked out. This surveillance function does not imply that the IMF will have power to determine the policies of member countries. It does, however, mean that the IMF will seek to ensure that members' behaviour should not be at the expense of other members' well-being. In particular the IMF will be concerned to ensure that members observe their undertaking to avoid exchange rate manipulation which could have potentially harmful consequences if resorted to on a wide scale.
I need hardly emphasise to this House the importance which we attach to the successful realisation of the objective of exchange rate stability. For a small open economy, such as ours, a stable external environment is particularly desirable.
The new system, in its flexible approach to exchange arrangements, will accommodate more the practice of large than of small countries. Most small countries will, no doubt, continue to peg their currency to that of one of the major currencies or to a basket of currencies. In this context, perhaps I should mention that no change in Ireland's exchange arrangements is required under the new system. As I have stated before, the Government are keeping our exchange rate position under continuous review and the balance of advantage is still considered to favour the present arrangements. The new IMF articles do, however, give us a wider range of choice of alternative regimes than the existing articles.
Before leaving the question of exchange rates, I should add that provision has been made in the amended articles for a possible return to a system of exchange arrangements based on stable but adjustable par values. This would be much less rigid than the Bretton Woods par value system as no country would be obliged to adhere to the par value system. The introduction of such a system would only be contemplated where there was general agreement that international economic and financial conditions were conducive to such a move. The essence of these provisions is to allow the flexibility which present economic realities require while permitting evolution to new arrangements as and when conditions permit. For the immediate future however it seems likely that the international monetary system will continue to be characterised by a diversity of exchange arrangements. The important change which the amended articles will entail is to make such arrangements subject to surveillance and guidance by the IMF.
Now that the exchange rate system established at Bretton Woods is being officially replaced, it is appropriate that the role of gold, which constituted the linchpin of that system, should also be reduced. Under Bretton Woods, gold was the ultimate reserve asset of the international monetary system. However, gold has long ceased to perform adequately its monetary functions.
With the growth of trade since the war, the need for international liquidity has also grown, but the stock of monetary gold has not grown correspondingly. Consequently the world has come to rely increasingly on holding US dollars and other currencies for its supply of reserves. In the event, the growth in dollar holdings led to the suspension by the US in 1971 of its undertaking to convert dollars into gold.
In recognition of the inadequacies of gold, the new system promotes a reduction in gold's monetary role in a number of ways. The most important changes under this heading include the abolition of the present official price of gold as well as abolition of the present obligation to use gold in certain IMF transactions—for example, in quota subscriptions and in payment of charges.
Most significant, perhaps, in this connection, is the provision empowering the fund to dispose of its gold holdings and to use any profits from that disposal for normal IMF purposes, or for other uses, including use for the special benefit of members with low per capita incomes. Already agreement has been reached on the disposal of 50 million ounces of gold, one-third of the total IMF gold holdings. Of this amount 25 million ounces is being sold back to IMF members in proportion to their IMF quotas at the official price of SDR 35 per ounce. The balance of 25 million ounces is being sold by auction with the profits over and above the official price being used for the benefit of developing countries through a Trust Fund. Auctions for this purpose have already commenced and are expected to continue at regular intervals over a four-year period.
One of the objectives set out in the new IMF articles is to make the SDR —the Special Drawing Right—the principal reserve asset of the international monetary system. This is a reserve asset created by the IMF at the end of the sixties. It was designed to supplement the supply of gold and foreign currency reserves to meet any need for international liquidity. If it were to become the principal reserve asset, it would also enable a measure of international control to be exercised over the global supply of liquidity. There has been a continued growth in recent years in the foreign currency component of official reserves, which has been considered adequate to meet the need for global liquidity. Consequently, no allocations of SDRs have taken place since 1972. There has not yet been agreement on measures that would ensure that a substantial part of the growth in global liquidity would be met through periodic allocations of SDRs.
The present amendment of the IMF articles provides for changes in the characteristics and expansion in the possible uses of the SDR which should enhance the attractiveness of the asset and promote the objective of making it the principal reserve asset of the international monetary system. Under the new system the SDR will assume an increasingly important role as a unit of account and as the preferred means of paying IMF charges. Furthermore the categories of official holders will be increased, countries will have greater freedom to enter into SDR transactions with each other on a voluntary basis and the rules governing the use of the SDR will be eased. Only time will tell whether these measures will promote the greater use of SDR, so necessary if it is to assume an increased role in the reformed monetary system.
Few would question the desirability of this end, which would ensure increased international control over world liquidity. For my part I welcome the prospect of increased international control of global liquidity which could help obviate the international inflationary pressures which we have experienced in recent years and to which we, as an open economy, are particularly vulnerable. It is therefore in the interest of all nations, but particularly of the smaller economies, to ensure that the objective of promoting the role of SDR, to which we subscribe in the proposed amendment, is realised as quickly as possible.
The IMF have taken the opportunity afforded by the present reforms to modify obsolete provisions and incorporate in the articles certain policies and practices that experience has proved useful.
The most significant change in this context is the provision that the IMF's holding of the currencies of each member will be usable by the IMF in order to provide balance-of-payments financing to other members—the basic purpose for which quota-subscriptions are required to be paid to the IMF by all members. However under existing arrangements some countries can effectively prevent the use of their currencies in IMF loans. Ireland and the other countries, which have permitted the use of their currencies, have long argued that such a situation throws a disaproportionate burden of financing on some countries while effectively reducing the resources available to the IMF. We therefore fully endorse the provision in the amended articles requiring that the currencies of all members be made usable. This will add substantially to the fund's usable resources and will strengthen its ability to provide temporary balance of payments assistance to members.
Among the other important operational changes are the simplification of the provisions governing the repayment of IMF loans and the granting of authority to the IMF to adopt special policies on the use of their resources, as may be required for special balance of payments problems. This again is further evidence of flexibility of approach, which today's economic relationships require to be built into the new monetary system.
Provision is also being made in the amended articles for improvement and change in the organisational aspects of the IMF. The most significant aspect of this change is an enabling provision which would permit the establishment of a new organ to be known as the council. This council would be similar to the present interim committee, a body representing all the member countries of the IMF, charged with advising on the management and adaptation of the international monetary system. The council would differ from the interim committee in that it would have powers of decision rather than be solely an advisory body.
A number of changes are necessary in the existing Bretton Woods Agreements Acts because of the amendment of the articles. These are largely concerned with simply changing the references in the Acts to various articles which have a new number in the amended articles and do not provide for any new powers.
Provision is being made for additional power to be given to the Central Bank to make any purchases of gold from the IMF required to be made by Ireland under the amended articles. This arises from the restitution of gold by the IMF which I have already mentioned. The Central Bank have been given the obligation to carry out transactions with the IMF on Ireland's behalf and it is appropriate that this additional power should also be given to the bank.
Pending ratification of the amended articles, the IMF decided to commence the restitution of gold using a "scarce currency" clause in the existing articles and the first restitution took place in January, 1977. This clause was incorporated in the Bretton Woods Agreement largely to cater for the scarcity of dollars which emerged in the post-war era.
When Ireland became a member of the IMF in 1957—to which effect was given in our Bretton Woods Agreement Act, 1957—it was not seen as necessary to provide for payments under this head. The Central Bank, using their general powers to purchase gold under the Currency and Central Bank Acts, 1927-1971, have effected the necessary transactions in connection with this first restitution. It is felt desirable to give retrospective sanction to these transactions in this Bill under the Bretton Woods legislation.
The subject of international monetary relationships is no doubt a mystery as far as most people are concerned. However, after the experience of the last five years, few will have failed to grasp the importance of a stable international monetary environment for balanced economic development at national level. We in Ireland have been particularly vulnerable to the international inflationary forces which were partly the cause, and partly the consequence, of the breakdown of the Bretton Woods system.
We attach considerable importance therefore to the proposed amendment of the IMF articles which heralds the return of the international monetary system to a legal framework. We are particularly pleased that the IMF will henceforth assume responsibility for surveillance of the multifarious exchange arrangements which have replaced the Bretton Woods par value system.
This is a matter of some delicacy, touching as it does on questions of national sovereignty. However, I am sure that all nations will subscribe to the end which it seeks to attain, namely the operation of the international monetary system in a manner which promotes the welfare of all while discouraging any selfish national measures which prejudice the interests of others.
Finally, let me say that the proposed amendment of the IMF articles while it represents a new and radical departure from the system established at Bretton Woods in 1944, nevertheless recognises the essential philosophy of the Bretton Woods Agreement— namely the interdependence of nations and a consequent determination to ensure international co-operation which would promote the welfare of all. It is in the spirit of the 1944 agreement that I now commend the approval of its amendment to the House.
