The General Arrangements to Borrow

The purpose of the GAB was to replenish the IMF’s resources with currencies other than the dollar. These additional resources would be available to help the United States address the concerns about a speculative flight from the dollar on the part of private-market actors and the threat of gold conversions en masse on the part of official dollar holders. The basic functionality of this new lending arrangement, as explained by then Chairman of the Federal Reserve William McChesney Martin Jr., was as follows:

The IMF would sell to the United States for dollars the major foreign convertible currencies that the IMF would borrow from the other participating countries. The United States could then use these currencies to buy up dollars offered in the market by private holders, and to redeem dollars acquired by foreign central banks in excess of the amounts they are willing to hold. This would tend to prevent dollar holdings of foreign central banks from becoming a drain on our monetary gold stock.[1]

Although the mechanics of how a new IMF lending arrangement would work were quite straightforward, the process of creating such an arrangement was not. The negotiation of the GAB signified a major shift in the postwar international political economy. During the Bretton Woods negotiations in 1944, the US delegation led by White so dominated the proceedings that Britain’s Keynes complained that "a cooperative international agreement was being undone as Americans reworked the Bretton Woods institutions to guarantee American preponderance.”[2] By 1961, the pendulum had swung the other way. It was now the United States, not the Europeans or Japanese, that needed liquidity.[3] This asymmetry in need determined the negotiating positions of the parties from the outset. The United States, as the country most likely to borrow and directly benefit from the new lending arrangement, had little leverage. The continental European countries, as the likely lenders, held nearly all the cards.[4] GAB negotiations involved many months of "tough bargaining and, often, bitter disagreement.”[5]

Two fault lines defined the difference between US and European preferences over the new arrangement: (1) the extent to which a new arrangement would be tied to the IMF and (2) the size of the arrangement. The original plan for the GAB, proposed by the United States and supported by IMF’s managing director, Per Jacobsson, was to put in place "firm commitments by the creditor nations to reinforce the IMF as a whole.”[6] That is, the rules that already governed IMF lending would remain in place for any new resources provided to the Fund. The United States supported this approach because it retained the largest percentage of votes within the Fund. Thus, tying any new arrangement directly to IMF governance would give the United States substantial influence over how quickly any new funds would be released and what conditions would be attached. The French delegation led the European Economic Community (EEC) members in opposing this approach. France had long resented what it believed to be a UK-US alliance that dominated global monetary relations since Bretton Woods. France worried that if the GAB was completely subsumed by the IMF, where the United States maintained unrivaled power, it would be difficult to impose the tough but necessary conditions on the United States in the event of a drawing.[7] France favored an approach that would only give the IMF limited influence over the use of the newly committed funds. In terms of a new arrangement’s size, as the likely borrowers, the United States naturally preferred that more resources be made available. President Kennedy wanted $4 billion in drawing rights for the United States.[8] On the other side, the EEC—which would be putting up the bulk of the money—preferred to have a smaller arrangement and proposed making only $2 billion available to the United States.

In November 1961, GAB negotiations officially began in Paris. In total, 10 industrial countries agreed to participate in the negotiations. This elite group earned two monikers: the Group of Ten (G-10) or, alternatively, "the Paris Club.”[9] The EEC countries entered with a strong bargaining position. They were the key surplus countries being courted and, at that time, had no foreseeable need of drawing on the arrangement. On the other hand, the United States’ negotiating position was weakened by the obvious self-interested motives behind the proposal. From the outset, the prospective creditors controlled the negotiations. The French, Belgians, and Dutch had three demands they insisted be met, or otherwise talks would not proceed. The first was that they would have much greater say over the use of funds than they did in the IMF itself. This included the possibility that there could be a separate review of the prospective borrower’s domestic policies. The second demand was that the creditor countries themselves would decide whether or not the Fund could borrow from them and loan the offering to a deficit country. Finally, they wanted concessions that the use of the new lines of credit would be limited to fighting a speculative attack against a major economy or to finance a

Table 3.1 GAB: INDIVIDUAL CREDIT ARRANGEMENTS

Participant

Units of

Participant’s

Currency

US Dollar Equivalent (in Millions)

Percentage

Share

United States

US$ 2,000,000,000

2,000

33.33

United Kingdom

? 357,142,857

1,000

16.66

Deutsche Bundesbank

DM 4,000,000,000

1,000

16.66

France

NF 2,715,381,428

550

9.16

Italy

Lit 343,750,000,000

550

9.16

Japan

? 90,000,000,000

250

4.16

Canada

Can$ 216,216,000

200

3.36

Netherlands

f. 724,000,000

200

3.36

Belgium

BF 7,500,000,000

150

2.50

Sveriges Riksbank

SKr 517,320,000

100

1.66

Total

6,000

100.00

normal drawing by the United States.27 In short, the ECC countries made it known that they did not want to create an institution that would rubber- stamp a bailout of the United States without imposing tough economic reforms. The United States had little choice but to accept these terms.

The US Treasury representative in Paris, Donald J. McGrew, visited with Jacobsson to describe the compromise that had been struck regarding the GAB. Jacobsson strongly opposed this approach, even calling the ECC demands "strange and silly!”28 He felt that by ceding most of the control over to the industrial creditor economies, the IMF would be marginalized. He made the case that any arrangement must meet three standards: (1) respect the Articles of Agreement, (2) not impair the authority of the IMF, and (2) give the IMF the authority to decide whether to borrow (participating countries could, however, decide whether to lend). In the end, the EEC countries conceded these points to Jacobsson and pacified at least one important US demand by agreeing to make a total of $4 billion in resources available to the United States. Table 3.1 lists the agreed-upon contributions of each country to the GAB.29

Regardless of these concessions, which were by no means trivial, the final design of the GAB was a victory for the EEC countries. When the G- 10 agreed on terms in December 1961, French Finance Minister M. Wilfrid

  • 27. Strange 1979, p. 111.
  • 28. Jacobsson 1979, pp. 376-377.
  • 29. Table adapted from Ainley 1984, p. 13.

Baumgartner triumphantly explained that the new resources would not be available to the IMF without restraint. Rather, they would "be submitted to scrutiny and discussed by the finance ministers of the [G-10].”[10] Any loan under the new agreement had to be agreed upon based on a cumbersome, if cleverly designed, procedure. A letter from Baumgartner to the other GAB participants sums up the agreed-upon system:

  • 1. To start with, the country in need of a loan is to first consult with the Managing Director of the IMF and then with the remaining participants in the arrangements.
  • 2. The Managing Director decides whether to formally ask for resources, in which case the participants (excluding the borrower) will enter into discussion. The aim is to reach a unanimous decision in favor or against the loan.
  • 3. If a unanimous agreement cannot be reached, the question will go to a vote (again, excluding the borrower). Requests must:

a. be approved by two thirds of the remaining nine participating countries and,

b. garner a three-fifths majority of votes, which were distributed in accordance with the resources each country put into the arrangement.

4. If the loan is approved, then the creditors then enter into additional consultations with the Managing Director regarding the amount of each currency that will be loaned to the Fund. In these consultations, participants have the ability to object to the proposal made by the Managing Director.[11]

The GAB was not designed to function as a well-oiled ILLR. Moreover, the final design of the GAB shifted power away from the IMF and toward the EEC countries. The United States had far less power within the GAB relative to normal operations of the IMF. This was best embodied by the voting structure, the specific formula ofwhich the EEC had developed with the explicit aim of giving veto power to their countries. As Baumgartner’s letter states, any loan had to garner a three-fifths majority of votes, which were determined by each country’s contribution. Susan Strange ably summarized how the veto was designed to function in practice:

The arithmetic would work as follows: a U.S. drawing would be the full amount less its own commitment, i.e. [$4 billion]. Three-fifths of this amount would be

[$2.4 billion]. But non-ECC participants (Britain, Canada, Japan, and Sweden) could only muster [$1.55 billion] “votes” between them.[12]

Thus, if all ECC members collectively opposed the terms of a US loan request, they could effectively block it.

During an IMF executive board meeting one month after the Paris negotiations, the United States’ top representative at the Fund, the executive director Frank Southard, voiced his country’s disapproval of the arrangement’s ultimate design. Although he begrudgingly admitted “the scheme was, of course, a compromise,” Southard pointed out the GAB’s “limitations” highlighting two issues. First, the GAB did not provide the Fund with “supplementary resources for its ordinary operations”— alluding to the fact that the control of the new funds were outside of the IMF’s control, where the United States maintained significant influence. Second, Southard explained that the United States would have preferred a system that did not require the Fund to consult with the prospective lending countries. In other words, here Southard was objecting to the rule that allowed the creditor ECC countries to deny a loan if they had sufficient votes to block it. It would have been better had the agreement empowered the managing director, after consulting the other executive directors, to decide “whether a particular exchange transaction or stand-by arrangement was necessary to forestall or cope with an impairment of the international monetary system.”[13]

In sum, the US officials felt that borrowing from the GAB was unnecessarily cumbersome and gave too much power to the EEC. This posed another problem from the United States’ perspective. If the United States were to borrow from the GAB, it would be subject to a list of policy conditions and austerity measures that the ECC would insist be a part of any loan. The ECC countries felt that the United States needed to adjust its domestic economic policies in order to reverse the private capital flowing out of the US economy; flows that were contributing to the global dollar glut. In the years leading up to the GAB negotiations, European policymakers signaled that they felt that threats to the dollar were partly a consequence of domestic inflationary pressures. The Fed needed to raise interest rates. According to an entry in Jacobsson’s diary, the Europeans also “expected that the Americans would have to do more or less the same things as they had done themselves—i ncluding the holding back of wage increases.”[14]

This prospect made drawing on the new arrangement all the more unpalatable to the Kennedy administration, which was focused on implementing a domestic economic program designed to stimulate the US economy—the exact opposite ofwhat the ECC wanted.

Despite myriad US objections, the Kennedy administration and the Federal Reserve strongly lobbied Congress to ratify the arrangement. Their dissatisfaction with its design notwithstanding, they understood that the GAB remained an important signal to markets (even if they had no intention of using it). In the event of an attack on the dollar either by speculative capital flows or demands at the gold window, the United States now had access to an additional $4 billion in foreign currencies. Combine this with the resources available via traditional IMF sources and the United States now had rights to some $5.2 billion in foreign currencies. It was a start. But US officials were still not content.

  • [1] US House 1962, p. 91.
  • [2] Frieden 2006, p. 259.
  • [3] The exception here was the United Kingdom, which was also facing significant balanceof payments issues of its own.
  • [4] A press report at the time summed the likely positions up this way: "As things look now,the United States is more likely to become a borrower than a lender” (Washington Post 1961).
  • [5] Strange 1976, p. 105.
  • [6] Ainley 1984, p. 7.
  • [7] As evidence of this, the French pointed to recent history. The United Kingdom was justbehind the United States in terms of voting power within the IMF. In August 1961, GreatBritain drew on Fund resources. Yet the French felt that the IMF had not imposed as strictan array of conditions on Great Britain as it had on the French when they borrowed fromthe IMF in 1958. France believed that Britain received easier terms due to its more powerful role within the institution and its close alliance with the United States on monetaryissues (Strange 1979, p. 109). This occurred despite the fact that Jacobsson had told UKcontacts that they had to willingly accept a stringent adjustment program in exchange for aloan because smaller countries would only submit to the Fund’s demands if countries likethe United Kingdom did as well (Jacobsson 1979, p. 368).
  • [8] According to Per Jacobsson’s account, when US Treasury’s representatives met withhim during the negotiation process, they proposed a plan that would allow any one country to borrow up to 125 percent of its quota. Jacobsson concluded that this was "obviouslythought to be to the benefit of the USA” (Jacobsson 1979, pp. 378, 381).
  • [9] Participating countries include Belgium, Canada, France, Germany, Italy, Japan, theNetherlands, Sweden, the United Kingdom, and the United States.
  • [10] Strange 1979, p. 112.
  • [11] EBS 1961, p. 13.
  • [12] Strange 1976, p. 118, footnote 44.
  • [13] EBM 1961, pp. 10-11.
  • [14] Jacobsson’s diary quoted in James 1996, p. 157. Jacobsson himself was prone to feelingthis way. In the spring of 1959, he was quoted in the New York Times as saying the US gold
 
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