The United States Invents Its Own ILLR, 1961-1962
We are accustomed to thinking of ourselves as a nation with almost limitless productive resources—a nation capable of turning out goods and services sufficient for our own needs and for a sizeable foreign demand, without undue monetary strain ... . This is true. But time moves swiftly.
Robert B. Anderson (Foreign Affairs, 1960, p. 419)
In the preceding chapter, I explained how at its creation the International Monetary Fund (IMF) reflected a distinctly US vision for how the international financial system following World War II would be stabilized in times of stress. Rather than follow John Maynard Keynes’s plan to create an entity resembling a global central bank, Harry Dexter White and the US delegates advocated for a multilateral institution without the capacity to create its own money, with relatively limited resources, and that would not provide credit automatically. In short, the problems of resource insufficiency and unresponsiveness—which reflected US preferences at the time—were part and parcel to the Fund’s anatomy at its birth. Yet, fewer than 20 years after the negotiations at Bretton Woods concluded, the US Federal Reserve was lending hundreds of millions of dollars to a handful of countries in need of short-term balance of payments assistance. However, unlike the Fund, the Fed provided these credits automatically and without conditionality. In effect, the Fed was acting as the global central bank that it resisted creating just a few years before.
Why did the United States change course so dramatically in such a short period of time? What motivated the United States to begin providing short-term liquidity to foreign countries when the IMF had been created for that very purpose not two decades earlier? Broadly speaking, two factors explain the shift. First, the IMF’s shortcomings as an international lender of last resort (ILLR) took 15 years to fully reveal themselves to US policymakers. The problems of resource insufficiency and unresponsiveness were not really problems at all during the initial postwar years. In that era, international capital mobility was severely restricted and crises were small and developed slowly. However, by the early 1960s, things were changing. Restrictions on capital flows were eased and cracks in the IMF’s ILLR credentials were made manifest. Second, for the first time since World War II had ended, the US found itself in need of an ILLR. The United States had designed the Fund to place the burden of adjustment on debtor countries at a time when US policymakers did not anticipate that the United States would soon become a debtor country itself. The changing nature of global finance and the Fund’s weaknesses as ILLR directly threatened two vital US economic interests that were intimately related to one another: the stability of the dollar’s exchange rate and the country’s gold stock.
Top US policymakers wanted a more effective ILLR mechanism that would give the United States access to substantial, on-demand financing. It was the Federal Reserve that ultimately delivered the goods. Between 1962 and 1963, the Fed negotiated an ad hoc system of swap agreements with 11 foreign central banks that gave the US monetary authority access to foreign exchange at a moment’s notice, outside of the auspices of the Fund. In exchange, the Fed had to make dollars available to its partner central banks under the same rules. In a matter of two years, the United States ended up as the primary liquidity provider in the system. Indeed, the Fed largely assumed the ILLR mantel from the IMF on behalf of those countries involved in the swap system. Yet the United States did not create the system because it wanted to provide easy credit to its partners. Reciprocity was just the price of admission. The United States pushed for the system of credit lines because it wanted a more effective ILLR mechanism for itself: one that could protect its own interests better than the IMF.