Director of the Fund, to study, and after consultations with member countries, to report to the Congress prior to May 15, 1981, with respect to:

* * *

"(1) the current adequacy of Fund resources, together with projected needs of the Fund over the next five years;

"(2) the feasibility of increasing Fund liquidity by encouraging the Fund to borrow directly from the governments of oil exporting countries;

"(3) the feasibility of increasing Fund liquidity by encouraging the Fund to borrow in private capital markets through the issuance of securities backed by Fund resources;

"(4) the feasibility of an offer by the Fund of incentives to oil exporting countries, including financial guarantees by the Fund for government-to-government loans to countries with balance-of-payments deficits, in order to promote more direct recycling of oil surpluses; and

"(5) methods to enhance cooperation between commercial banks and the Fund to promote the availability of adequate resources for balance-of-payments financing. 94 Stat. 1553.

Sec. 4(b) of P.L. 96-389 also added (new) Section 35 to the Bretton Woods Agreements Act; viz., the sense of Congress that the Secretary of the Treasury and the United States Executive Director of the Fund are to encourage Fund member countries to negotiate a dollar-Special Drawing Rights Substitution Account in which equitable burden sharing would exist among Account participants.

Secs. 6 and 8 of P.L. 96-389 set out sense of the Congress provisions concerning, respectively, membership by Taiwan (in regard to which see this Digest, Ch. 2, §3, ante) and assistance by the Fund to the private sector, particularly in El Salvador and Nicaragua (in regard to which see this Chapter, §3, post). Sec. 7 contained a statement of United States policy against giving the Palestine Liberation Organization membership in the Fund, or observer or any other official status at any Fund-sponsored or Fund-associated meeting (in regard to which see this Digest, Ch. 2, §7, ante).

Sec. 10 of P.L. 96-389 required the Secretary of the Treasury to establish and chair a commission (with designated memberships) to conduct a study to assess and make recommendations with regard to the policy of the United States Government concerning the role of gold in domestic and international monetary systems, and to report its findings and recommendations to the Congress not later than one year after the date of enactment of P.L. 96-389.

Testifying in support of S. 2271 (which became Public Law 96-389) before the Senate Committee on Foreign Relations on March 10, 1980, Secretary of the Treasury G. William Miller justified the proposed increases in IMF quotas, in a statement that read in relevant part:

Throughout its history, the IMF has needed periodic increases in its quotas in response to the rapid growth of world economic activity and international trade and financial transactions. To maintain a strong IMF, capable of encouraging needed adjustment while providing the temporary financing required to maintain monetary stability, we must assure that its resources are adequate to meet potential demands. The proposed 50 percent general increase in IMF quotas is a key element in assuring that strength.

The decision to propose a 50 percent overall increase in quotas reflected a widely felt view that quotas had, by any measure, failed

to keep pace with potential balance of payments financing needs. Despite quota increases on four occasions during the IMF's history, aggregate quotas had fallen to about four percent of annual world imports in comparison with 8 to 12 percent during the 1960s and 10 to 14 percent during the 1950s. The adequacy of quotas had eroded partícularly during the seventies, as the ratio of quotas to members' aggregate deficits fell by two-thirds between 1971-73 and 1978. In mid-1978 the Fund's usable quota resources-that is, its holdings of the currencies of members then in strong payments positions-totaled only about SDR 16 billion, or just over one percent of world imports. In November 1978, before the Supplementary Financing Facility was put in place, the amount of usable quota resources was effectively halved to around SDR 8 billion when the U.S. drew the equivalent of $3 billion and the dollar was taken off the IMF's "budget" of currencies used in financing current drawings.

These shifts in the IMF's "liquidity" illustrate the difficulties of projecting either the level of usable IMF resources or the level of future drawings on the Fund. In its 1977 quota review, the IMF estimated that the level of international transactions between 1978 and 1983 would increase by 60 percent in SDR terms. In fact, that 60 percent figure is now much too low, as inflation, oil price increases, and other factors have caused a much more rapid expansion in the value of world trade and financial transactions. And even if we could accurately predict future levels of world trade, we would not know the pattern of trade, the size and distribution of payments imbalances, or the availability of financing from banks and other sources.

In determining how large a quota increase would be needed, it was recognized that the IMF's Supplementary Financing Facility, introduced last year to provide badly needed resources to the IMF on a temporary basis, would be phased out after a 2-3 year period. That Facility was proposed and is regarded as a bridging operation to be followed by an increase in the IMF's permanent

resources.

It was in the light of these considerations that the IMF membership concluded that a 50 percent increase in total quotas would be the minimum required to assure that the IMF remained in a strong position to meet prospective needs. Even a 50 percent increase will do little more than slow the decline in the relative size of IMF resources into the mid-1980's. In fact, most developing countries and some OECD (Organization for Economic Cooperation and Development) members, fearing growing world economic uncertainties, pressed hard for a much larger increase.

The IMF must have adequate resources-and this means adequate quotas-to encourage countries to adjust in an appropriate way, rather than adopt trade and capital restrictions, aggressive exchange rate policies, or unduly restrictive domestic measures in order to reduce their financing needs. Such restrictive measures could have serious implications for the entire world economy and the prosperity of all nations, as well as for the economy of the country introducing them. We must not forget the lessons of the

1930's, when serious economic troubles were worsened by ultimately self-defeating actions of nations trying individually to preserve employment and prosperity during times of economic distress and international tension. The impact on the United States today could be especially harmful. Our economy has grown heavily reliant on world trade and financial flows. An interdependent world brings real economic benefits, but also greater vulnerability to outside developments. Imported goods, from raw materials to high technology products, are integrated into all phases of U.S. economic activity. Export markets constitute a major source of demand for U.S. goods and services. One out of every seven U.S. manufacturing jobs and one out of every three acres of U.S. agricultural land produce for export. For the U.S. economy specifically and the world economy generally, prosperity is dependent on a well-functioning international financial system.

Uncertainties about the magnitude, distribution, and financing of payments imbalances over the next few years make it impossible to project the precise level of IMF resources that will be used during the next five years. But we must assure ourselves that the IMF's resources are sufficient to enable it to meet its important responsibilities-sufficient as measured against historic standards and current trends, and sufficient against a realistic appreciation of the dangers we face as we enter a new decade.

Mr Chairman, the proposed quota increase is important for three reasons.

First, from the point of view of the international monetary system as a whole, it will help assure that the IMF can continue to meet its responsibilities for international monetary stability in a period of strain, danger, and financial uncertainty.

Second, from the point of view of individual countries, it will provide additional resources to encourage cooperative balance of payments adjustment policies-and I note that IMF resources have been of major direct benefit to the United States when we faced severe balance of payments pressures.

Third, from the point of view of the United States, it maintains our financial rights and our voting share in the institution during a time when far-reaching changes in the monetary system-for example, a substitution account-may be under consideration.

The record of the IMF is a good one in adapting to changing world circumstances and responding to the needs of its members. The proposed quota increase will provide the Fund with resources needed for its valuable work, and I urge the Committee to approve this legislation.

The Bretton Woods Agreements Act: Hearings . . . [on S. 2271[,] To Amend the Bretton Wood Agreements Act to Authorize Consent to an Increase in the United States Quota in the International Monetary Fund], before the Sen. Comm. on Foreign Relations, 96th Cong., 2d sess. (1980), pp. 12-14, 16.

Testimony of Under Secretary of State for Economic Affairs Richard N. Cooper may be found at ibid., pp. 25 ff., with a prepared statement at pp. 25-28.

Prior to the hearings, Senator Jacob Javits had requested the views of Paul Volcker, Chairman of the Board of Governors of the

Federal Reserve System, regarding the proposed 50-percent increase in the United States quota in the International Monetary Fund. Mr. Volcker's reply, dated February 19, 1980, was included in the record of the hearings, and echoed many of Secretary Miller's remarks (quoted, ante).

See, ibid., pp. 22-23.

Following the hearing, Under Secretary of State Richard N. Cooper submitted a separate comment on the proposed Substitution Account to Senator Paul S. Sarbanes, who had presided at the hearing. The substantive portion of his letter, dated March 31, 1980, follows:

As you know, the structure and operation of the Account are being actively discussed in the IMF and among the major countries. There are difficult and complex issues in the establishment of the Substitution Account, involving in particular how to ensure its financial balance and how to share equitably any possible costs of its operations. Successful resolution of these issues will take time and patience. I am convinced, however, that a properly designed Substitution Account will be beneficial to the international economic system, and that we should continue to work for its establishment, provided that acceptable ways can be found to secure its financial viability and to share equitably among participants the possible costs.

The Substitution Account would provide two major benefits. It would offer countries holding large amounts of dollars (or other national currencies) the opportunity to exchange any unwanted portion for reserve assets denominated in Special Drawing Rights (SDR) and thus to diversify their foreign exchange assets and reduce exchange risk. The Account would reduce the tendency for such countries to diversify out of dollars and into other currencies through the exchange markets.

In the longer-term, the Substitution Account will be a concrete step toward the generally agreed objective of eventually bringing the SDR to a more important role in the monetary system. The dollar currently makes up about 80 percent of the world foreign exchange reserves. The dollar's predominance reflects past U.S. dominance in the world economy as well as its continuing use in international economic transactions and as an intervention currency. However, the rapid growth of other industrial economies and of their financial strength has resulted in a growing international use of their currencies. It is widely believed that it is preferable to develop an international reserve instrument, such as the SDR, as an alternative reserve asset rather than allow the system to evolve toward general use of several currencies. Such an unmanaged "multi-currency reserve system" could be unstable as holders switch among currencies based on their perception of short-run economic events.

These benefits of the Substitution Account would accrue to all members of the system. The Account is not a mechanism to give short-run support to the dollar, as it has sometimes been portrayed. Because its benefits are universal, we will continue to insist that any potential costs of the Substitution Account should be shared equitably by all participants.

Ibid., pp. 38-39.

In regard to the Supplementary Financing (Wittaveen) Facility, see further, the 1978 Digest, pp. 1262-1266.

See, also, testimony by Anthony M. Solomon, Under Secretary of the Treasury for Monetary Affairs, before the Subcommittee on International Trade, Investment and Monetary Policy of the House Committee on Banking, Finance, and Urban Affairs, Feb. 4, 1980; To Amend the Bretton Woods Agreements Act to Authorize Consent to an Increase in the U.S. Quota in the International Monetary Fund: Hearings before the Subcomm. on International Trade, Investment and Monetary Policy of the House Comm. on Banking, Finance, and Urban Affairs, 96th Cong., 2d sess., pp. 10-22.

And, see, testimony by C. Fred Bergsten, Assistant Secretary of the Treasury for International Affairs, before the Subcommittee on International Finance of the Senate Committee on Banking, Housing, and Urban Affairs, Mar. 31, 1980; International Monetary Fund and Related Legislation: Hearings before the Subcomm. on International Finance of the Senate Comm. on Banking, Housing, and Urban Affairs, 96th Cong., 2d sess., pp. 6-21.

$2

International Trade

Venice Economic Summit

-J.E.A.

The sixth economic summit meeting of the leaders of the world's major industrialized democracies was held at Venice, June 22-23, 1980. The participants included President Jimmy Carter of the United States, Prime Minister Margaret Thatcher of the United Kingdom, Prime Minister Pierre Elliott Trudeau of Canada, President Valéry Giscard d'Estaing of France, Chancellor Helmut Schmidt of the Federal Republic of Germany, Prime Minister Francesco Cossiga of Italy, Foreign Minister Saburo Okita of Japan, and President Roy Jenkins of the European Commission (the Commission of the European Community).

The Declaration issued at the conclusion of the summit on June 23, 1980, defined the reduction of inflation as the immediate top priority (it would benefit "all nations"), and, emphasizing the relationship between inflation and economic growth on one hand and energy price and supply on the other, set out a number of undertakings to "break the existing link between economic growth and consumption of oil... in this decade."

The Declaration expressed concern about specific problems of the developing countries, not only those caused by imported oil price