IN SEARCH OF AN ILLR

Although the Bretton Woods monetary order had already weathered several crises, this was the first that threatened the stability of its linchpin currency.[1] If a speculative attack on the dollar were to unfold, the United States would need access to an external source of credit in foreign currencies other than the dollar. For instance, borrowing French francs would enable the United States to slow a speculative flight from the dollar by entering into foreign exchange markets and selling francs to buy excess dollars that were being moved out of the country. Or, alternatively, it could exchange francs for dollars being held by the French central bank in order to preempt a conversion of those dollars into gold. At the time, the IMF was the closest thing the world economy had to an ILLR. However, the majority of the IMF’s resources were in US dollars.[2] In November 1961, for example, the United States had rights to borrow $5.8 billion from the IMF. However, the Fund’s holdings of the major industrial country currencies, other than British pound sterling, only amounted to $1.6 billion.[3] Thus, the Fund was really only equipped to provide to the United States a loan in its own currency. Such a loan would do nothing to defend the dollar from the risks it was facing.

The IMF had insufficient resources to cover a potential drawing from the United States.[4] In light of this, both US economic policymakers and executives at the IMF began to consider ways they could bolster the institution’s access to currencies other than the dollar. What ultimately developed was a proposal for a new lending agreement, known as the General Arrangements to Borrow (GAB), among the major industrial powers. Yet, even as the new arrangement increased US access to foreign exchange, it also increased the number of hoops that the country would have to jump through in order to access this financing. In other words, the GAB addressed the IMF’s problem of resource insufficiency and replaced it with the problem of unresponsiveness.

  • [1] Previous crises include the wave of devaluations (led by sterling) in 1949 and the sterling crises in 1951, 1953, and 1957.
  • [2] Indeed, the vast majority of its lending at this time was in dollars. Until 1960, 87 percent of all drawings were in that currency (Strange 1976, p. 104).
  • [3] Solomon 1982.
  • [4] Even more so than a potential US drawing, what really kept the IMF executives upat night was the potential for a simultaneous drawing by the United States and the UnitedKingdom. There was a very real fear that in such an event there would not be sufficientresources to go around. This concern became especially acute in light of a drawing by theUnited Kingdom in the summer of 1961. The British withdrew $1.5 billion; however, onlyone-third of this was in dollars due to US insistence that the majority of the loan be in thenine other convertible currencies held at the Fund. This single drawing nearly exhaustedthe IMF’s lendable resources—in fact, it was forced to sell $500 million of its own gold torebuild its currency stock (Strange 1976, p. 108).
 
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