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Seanad Éireann debate -
Wednesday, 25 May 1977

Vol. 86 No. 13

Bretton Woods Agreements (Amendment) Bill, 1977: Second and Subsequent Stages.

Question proposed: "That the Bill be now read a Second Time."

, Cavan): 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 second amendment to the IMF articles represents the most important reform of the international monetary system since the inception of the par value system based on fixed exchange rates at Bretton Woods in 1944. The par value system came under increasing strain during the sixties and eventually began to crumble in the early seventies as countries abandoned fixed exchange rates in favour of floating and other exchange rate arrangements. These developments, which contravened the existing IMF Articles of Agreement, necessitated a major re-appraisal of the international monetary system to take account of the changed economic realities of the seventies. The results of this re-appraisal are incorporated in the second amendment to the IMF articles.

An explanatory memorandum has been circulated along with the Bill for the information of Senators, setting out the main themes of the proposed amendment. The most significant change in the new international monetary system concerns the exchange arrangements which countries may adopt. The Bretton Woods system envisaged international monetary stability as being based on a system of fixed 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 divergencies 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, a period which was 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 approach inherent in the new system is radically different from Bretton Woods in that each country will now be free to adopt the exchange rate arrangements 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 retain an unrealistic fixed exchange rate with consequential costly intervention buying and eventual forced devaluation. 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.

The IMF will have an important role in ensuring the smooth functioning of the new system. It will be required to "exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies". The object of the fund in formulating these guidance principles is to give member countries a reasonably clear impression of the kinds of exchange rate policies that would lead to an under- or over-valued currency which would be prejudicial to the interests of other members. The fund will not of course have power to determine the policies of individual countries. However, the knowledge that the fund is maintaining a critical oversight on the functioning of the international monetary system should make countries more aware of the necessity of pursuing exchange rate policies which conform to their international obligations.

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 major economies of the world, which effectively determine the environment in which we must operate and whose currencies have been floating in recent years in contravention of the existing articles, will now be obliged to exercise their freedom of action in the exchange rate field in a responsible fashion. 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.

Under the exchange rate system established at Bretton Woods, gold played a central role. As the ultimate reserve asset of the international monetary system it effectively constituted the linchpin of that system. Now that the Bretton Woods system is being officially replaced, it is appropriate that the role of gold should also be reduced. It has long been clear in any case that gold was inadequate for the monetary role it was required to play.

While the need for international liquidity has grown in line with the growth in world trade since the war, the stock of monetary gold has not grown correspondingly, with the result that the world has come to rely increasingly on holdings of US dollars and other currencies for its supply of reserves. The result of this over-reliance on dollar holdings led in turn to the suspension by the US in 1971 of its undertaking to convert dollars into gold.

Recognising the inadequacies of gold, the new system promotes a reduction in its 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 holding 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.

In place of gold the new IMF articles seek to make the SDR—the Special Drawing Right—the principal reserve asset of the international monetary system. The SDR is a reserve asset created by the IMF at the end of the 1960s to supplement the supply of international liquidity. It is a much more suitable form of liquidity than either gold or foreign exchange in that its supply can be internationally regulated to meet the global need for liquidity at any particular time. At the present time however it constitutes only a small proportion of total liquidity, which has been supplied chiefly through the growth of foreign exchange holdings in recent years Agreement has yet to be reached on measures that would ensure the assumption by the SDR of a much more significant role in supplying international liquidity in place of foreign exchange holdings. However the amended articles go some way towards facilitating this end, principally by expanding the possible uses of the SDR.

It remains to be seen whether these measures will be sufficient to promote the greater use of the SDR, which is a necessary precondition to its becoming the principal reserve asset of 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 such as ours, 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. Up to the present time countries could in effect prevent the use of their currencies in IMF loans. The result of this has been to reduce the resources potentially available to the fund while throwing a disproportionate burden of financing on countries such as Ireland which have permitted the use of their currencies. We therefore fully endorse the provision in the amended articles requiring that the currencies of all members be made usable.

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 is further evidence of that capacity for adaptation which is the hallmark of the new monetary system and which is essential to service the needs of member countries in a rapidly changing international environment.

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 in composition and representation 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. Under present arrangements Ireland is grouped in the IMF in a constituency with Canada and a number of Caribbean countries and would be represented in the council by the Finance Minister of the constituency's largest country —namely Canada. We would be entitled to appoint two associates who would act as advisers to the Canadian Minister. As the council, unlike the interim committee, would have powers of decision, the constituency representative would be able to cast votes separately on behalf of individual members of the constituency. Ireland's views could therefore be fully reflected in the council.

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. It is particularly appropriate that this additional power should also be given to the bank since the purchases of gold would in effect simply result in a change in the composition of our official reserve holdings.

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 this transaction in this Bill under the Bretton Woods legislation.

The functioning of the international monetary system is no doubt something of a mystery as far as most people are concerned. However, after the experience of the last five years, it is clear to all that a stable international monetary environment is very important 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 herald 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 various exchange agreements 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.

I commend the Bill to the House.

We have no objection to accepting this legislation. The Minister has outlined in his very comprehensive speech the many things he sets out to do. It is very important now in view of the fact that not alone does a large portion of our trade take place with England but that we have branched out into the EEC and the world market. It is important to any country to ensure that the unit of exchange works in a harmonious fashion. For that reason it was found necessary to review the Bretton Woods Agreement, 1957, to more or less streamline it and to adapt it to present day conditions. This whole monetary system is a very wide field and something I do not profess to know very much about. In cases like this often people raise this question of breaking links with sterling, switching over to dollars and so on. I do not know if the present would be an appropriate time to do that. Governments have to take some notice of views expressed on this matter and examine it. We on this side of the House, are content to agree with what has been done. It is a very necesssary step and I welcome the Bill.

, Cavan): I thank Senator Dolan for his acceptance of the Bill. As he said this is complicated and complex legislation. International finance is something which is only understood completely by a very limited number of people. That reminds me of a story I heard about a county council meeting held a long time ago. One member was waxing eloquently on international finance. Another more learned member stood up later and said that he understood on good authority that only seven people in the world fully understood finance and he was mighty proud to be a member of a county council which boasted among its members one of those. This is particularly complex legislation but, as Senator Dolan said, the effect of it is to up-date the Bretton Woods Agreement, 1957, to have regard to the changes which have taken place since and to provide a stable international currency.

Senator Dolan also raised the question of our link with sterling. This is frequently raised on occasions like this and is under constant consideration and review. The best advice available is that our interests, at present at any rate, lie in the continuation of the link with sterling. That is the only point Senator Dolan raised and he has agreed with the policy of the Government on this matter. I thank the Seanad for accepting the Bill and agreeing to give a Second Reading.

Question put and agreed to.
Agreed to take remaining Stages today.
Bill put through Committee, reported without amendment, received for final consideration and passed.
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