Free A History of the Federal Reserve, Volume 2 by Allan H. Meltzer Page B

the IMF, where it could veto proposals.

    The major issues that had to be resolved included whether the new units would be credit or money, who would get the new units, whether the new unit would be tied to gold, and who would decide on the size and frequency of additions to the stock—how many votes would be required and who would be able to vote. The United States and France generally differed on these issues. The U.S. task was to move ahead without attacking the French position in a way that would end the meetings.
    By June 1967, the group had resolved several issues. However, France continued to insist that reserves supplied by the new mechanism had to be repaid. Differences about who would have power to veto additions to reserves also remained. One reason for the deadlock was that France and others believed that the United States intended to pay off its liabilities by creating new pieces of paper unrelated to gold or other assets. The French did not want a system that would permit the United States to pay its debts with a new paper asset.
    France gained a concession when the Group of Ten agreed to name the new unit a special drawing right (SDR). Unlike other IMF drawings, however, the new unit was transferable and remained available for future transfers. France accepted the decision to make the new units permanent. This left only decisions about voting as a major issue. At the IMF annual meeting in Rio de Janeiro in September 1967, the members voted to approve the new asset as a supplement to existing reserve assets. 54 Finally at Stockholm on March 29 and 30, 1968, ministers agreed on the SDR and once again reaffirmed their commitment to the $35 per ounce gold price. To obtain agreement by the Europeans (other than France), the United States accepted that the European Union, like the United States, could veto any future increases in IMF quotas.
    The IMF could issue SDRs only if an 85 percent majority approved. Under the 1944 Bretton Woods enabling legislation, Congress had to approve any increase. When approved, IMF members could create an asset to serve as a substitute for gold in settlement between central banks and governments but not as payment for quota increases at the IMF. France reiterated the need for adjustment and did not sign the agreement until autumn 1969. Congress quickly approved the amendments to the IMF agreement, and President Johnson signed the agreement on June 19, 1968. The agree ment received enough support to enter into effect on July 28, 1969. The first issue of SDRs came on January 1, 1970.
    54. France tried to the end to get agreement on an increase in the gold price. It proposed making the U.S. use profits from depreciation to redeem part of its outstanding liabilities.

    Robert Solomon, who did a great deal to achieve agreement on the SDR and the broader issue of providing liquidity, summed up the experience. At the time he thought that the decisions in March to close the gold market and to adopt the SDR “may turn out to have marked a turning point in world monetary history” (FOMC Minutes, April 2, 1968, 13). In his book, he revised this conclusion. “Even if establishment of a reserve-creating mechanism was a necessary condition for international payments balance . . . earlier attention should have been given to introducing greater flexibility of exchange rates” (Solomon, 1982, 167). Much earlier, Haberler and Willett (1971) criticized the decision to devote much time to the liquidity problem and not to the adjustment problem.
    The case for SDRs was far less than compelling. As the French never tired of pointing out, the system had excess liquidity. The United States argued that this would not always be true, that ending the U.S. payments deficit would, sooner or later, lead to a liquidity shortage.
    This argument suffered from two weaknesses. First, U.S. representatives had no plan for achieving balance and spent little effort on that problem. Second, the argument was false or, at