THE EXCHANGE STABILIZATION FUND

In 1978, IMF member nations passed the Second Amendment to the IMF Articles ofAgreement to reflect the new realities ofthe international monetary system. In short, the amendment "established a new code of conduct for exchange arrangements” after the Bretton Woods par value system collapsed earlier that decade.1 Under the Bretton Woods regime, member countries’ ability to adjust their exchange rates was severely restricted. Member countries had to express par values in gold, either directly or by way of their peg to the US dollar. Any member that opted to adjust the value of their currency outside of preset limits set by the Fund would lose their drawing rights at the institution. Beginning in 1973, most major currencies began floating. However, member nations had not amended the IMF Articles of Agreement to reflect this; thus, most of the major industrial economies were in technical violation of the IMF’s original Articles ofAgreement. The Second Amendment gave member countries total freedom to decide what type of exchange arrangement they wanted. It was no less than "a complete departure from the par value system.”[1] [2] Prior to the adoption of the Second Amendment, the US law that authorized US participation in the IMF, known as the Bretton Woods Agreements Act of 1945, required Congress to pass its own amendment to the aforementioned Act, formally acknowledging the shift in the rules of the global monetary system. Congress considered the amendment in 1976. Besides authorizing these reforms at the Fund, Congress also reconsidered the mandate of the Treasury’s ESF, as it had also become outdated.

In 1933, President Franklin D. Roosevelt had taken the dollar off of the gold standard, resulting in a substantial decline in the dollar’s value. The following year Congress created the ESF when it passed the Gold Reserve Act of 1934. In that law, Congress gave the Secretary of the Treasury full authority over the fund (subject only to the consent of the president) and authorized the secretary to use the resources of the ESF "for the purpose of stabilizing the exchange value of the dollar.”[3] Over the intervening years, ESF resources were typically used for this purpose.[4] This mechanism was especially valuable under the par value system of Bretton Woods until the early 1960s when the central bank swap network somewhat marginalized its role. When the dollar was allowed to float in the early 1970s, stability gave way to flexibility. The ESF’s relevance declined further. Add to this the emergence of private balance of payments financing and the continued maintenance of the central bank swap network and the ESF had become a relic of a bygone era. That was until the passage of amendments to the Bretton Woods Agreements Act and its enactment on October 19, 1976, which marked an important new beginning for the ESF. The congressional amendments, which paved the way for the Second Amendment’s implementation at the IMF, gave the ESF a new mandate that adapted it to the monumental changes taking place in the international financial and monetary systems. Moving away from the specific language regarding the stability of the dollar, Congress now directed the Secretary of the Treasury to use ESF resources "as he may deem necessary to and consistent with the United States obligations in the International Monetary Fund.”[5]

In practice, the new role that Congress and (more importantly) the Department of the Treasury envisioned for the ESF was essentially that of a financial "first responder.” The basic idea was that Treasury could tap the ESF to provide short-term assistance to countries that had already entered into negotiations with the IMF. However, the borrower might need funds immediately that could bridge the gap between a request for IMF financing and the actual approval and disbursement of funds. Such credits were appropriately referred to as bridge loans. To be clear, Congress had not authorized the ESF to compete with the Fund; rather, it had instructed Treasury to assist it. At the same time, however, Treasury was not interested in building bridges to all IMF loans. ESF lending was to be far more selective. While serving as Under Secretary of the Treasury for Monetary Affairs for the Carter administration, Anthony Solomon explained to Congress that from now on ESF credits were to be used

primarily [as] bridging operations to countries that are entering stabilization programs with the Fund and will therefore be drawing from the Fund’s, and our credit operations, which are very few as you know, very selective, and designed to help the country get into a condition to . . . qualify for [the] . . . kinds of international standby conditions that the Fund would require and to meet the Fund’s conditions vis-a-vis that country.[6]

To ensure that the ESF would assist, but not replace, the Fund, the US Senate added an amendment to the 1976 bill that emphasized that "the goal for the [United States] is to place primary reliance on the IMF and to confine foreign exchange lending operations outside the IMF to short-term operations.”[7] However, a 1977 amendment made allowances for longer-term financing when "unique or exigent” circumstances made this necessary. Yet once again it was noted that "in none of these cases should the ESF compete with the IMF, however, and every effort should be made to bring all medium- and longer-term financing within the framework of the IMF or other appropriate multi-lateral facilities.”[8]

Table 4.1 lists ESF credits to foreign governments by country and year from 1977 (the first full year after the ESF’s congressional mandate was revised) to 2002 (the last year Treasury made an ESF credit to a foreign government). Table 4.1 also reports the total net resources committed to each recipient for that calendar year in constant 2010 dollars. By net resources I mean the sum total of all credits provided within a particular calendar year. This is relevant because, in certain cases, countries received multiple credits over the course of a year. Sometimes this means Treasury renewed an expired credit at the same amount; in other cases, it means Treasury provided an additional credit on top of a preexisting swap line. Thus, the total number of credits provided is also listed in Table 4.1 along with whether or not the loan was bilateral (involving only the United States and the borrowing country) or multilateral (involving additional creditors). Multilateral loans involved US cooperation with additional central banks, which was typically coordinated via the Bank for International Settlements (BIS).[9] Totals listed represent the US portion of such multilateral packages. On a few rare occasions, the ESF acted to guarantee portions of loans to sovereigns made by the BIS.[10] These are denoted in the table as well.

Collectively, Treasury provided a total of 54 credits on behalf of 24 foreign countries, totaling almost exactly $100 billion in 2010 dollars during these years. Ofcourse, unlike the IMF, whose raison d’etre as a multilateral international institution is to provide emergency financial assistance to its members, the United States is not bound by any such mandate. Hence, in contrast to IMF lending, a decision by the United States to extend a bailout to a financially distressed government is entirely discretionary and

Country

Year

Net Size, 2010 USD (Billions)

Number of Credits

Bilateral or Multilateral

Argentina

1984

1.679

2

B

Argentina

1985

0.304

1

M

Argentina

1987

0.816

2

B/M

Argentina

1989

1.502

2

M

Argentina1

1995

0.358

1

M

Bolivia

1986

0.199

1

B

Bolivia

1989

0.484

3

B

Brazil

1982

4.474

5

B/M

Brazil

1983

0.875

1

B

Brazil

1988

0.461

1

M

Brazil1"

1999

6.689

1

M

Costa Rica

1990

0.047

1

B

Ecuador

1986

0.298

1

B

Ecuador

1987

0.060

1

B

Guyana

1990

0.053

1

M

Honduras

1990

0.137

1

M

Hungary

1990

0.033

1

M

Indonesia

1998

4.013

1

M

Jamaica

1983

0.109

1

B

Korea

1998

9.102

2

M

Macedonia1

1994

0.007

1

M

Mexico

1982

3.614

2

B/M

Mexico

1986

0.543

1

M

Mexico

1989

7.253

1

M

Mexico

1990

1.001

1

B

Mexico

1994

17.769

3

B/M

Mexico

1995

30.762

2

B/M

Netherlands

1981

1.199

1

B

Nigeria

1986

0.074

1

M

Panama

1992

0.225

1

B

Peru

1993

0.709

1

B

Philippines

1984

0.094

1

B

Poland

1989

0.352

1

M

Portugal

1977

1.079

1

B

Romania

1990

0.064

1

M

Uruguay

2002

1.805

1

B

Venezuela

1989

0.791

1

B

Venezuela

1990

0.174

1

M

Yugoslavia

1983

0.164

1

M

Yugoslavia

1988

0.092

1

M

+ Denotes these were ESF guarantees of BIS credits to the borrowing country.

° Denotes long-term financing was provided by the World Bank, not by the IMF.

highly selective. What explains Treasury’s decision to use these resources for these purposes? As I have argued, the United States will act as an ILLR when either the IMF is too slow or its resources are too constrained to protect vital US economic interests. In the following sections, I consider how the global financial system changed in the 1980s and then again in the 1990s in ways that called into question the IMF’s crisis-management capabilities. In response, US policymakers used the ESF as a means to correct for the Fund’s flaws and protect the US economy.

  • [1] IMF 2006, p. 1.
  • [2] Ibid., p. 1.
  • [3] US Senate 1934, p. 1.
  • [4] However, there were also a considerable number of cases where, prior to 1977, the ESFwas used to provide credits to foreign governments.
  • [5] US Senate 1976, p. 18.
  • [6] US Senate 1977, p. 24.
  • [7] US Senate 1995, p. 447. Emphasis added.
  • [8] US House 1995a, p. 380.
  • [9] Unfortunately, I was unable to acquire the names of the other lenders in each of thesemultilateral cases. The BIS will not release this information, nor will the central banks orfinance ministries of the likely suspects: France, Germany, Japan, and the United Kingdom.Each were contacted and declined to reveal which multilateral BIS rescues they participatedin. For more information on the BIS’s role as a crisis lender, see Howell 1995 and Siegman1994.
  • [10] Under the ESF statute, a guarantee is treated the same as a credit (US House1995a, 357).
 
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