Special Message to the Congress: "Strengthening the International Monetary System.

To the Congress of the United States:

Twenty-four years ago, President Franklin D. Roosevelt asked the 78th Congress to approve a monetary plan which he called the "cornerstone for international economic cooperation."

The Bretton Woods Agreement--and the International Monetary Fund which it created--helped map the recovery of a war-ravaged world.

Today I ask the Congress to take another historic step. I seek approval of an amendment to the International Monetary Fund Agreement, to adapt it to changing world conditions. This change--the first since the Agreement was ratified in 1945--is both timely and necessary. It will prepare us for the era of expanding world trade and economic opportunity that unfolds before us.

RECOVERY AND EXPANSION

The financial statesmen who shaped the Bretton Woods Agreement in 1944 looked beyond the holocaust of war to a time of peace. They remembered the harsh lessons of a depression which had led the world into war.

They knew what had to be avoided--restrictive monetary policies that strangled progress, competitive depreciation of currencies that led to instability, and the breakdown of international cooperation that impeded trade.

They knew what had to be built--a cooperative monetary system to foster world economic expansion in a climate of mutual trust and assistance.

The machinery established at Bretton Woods--through the International Monetary Fund--brought stability to the exchange rates among the currencies of different nations. It brought order to international financial markets and transactions. It created a carefully designed system of cooperation in dealing with international financial problems.

The machinery as it operated in the quarter-century since World War II produced a record of unparalleled economic progress. The economies of war-ruined nations were rebuilt and have grown on an unprecedented scale. World imports surged from $59 billion in 1948 to $202 billion in 1967.

But when Franklin Roosevelt urged approval of the Bretton Woods Agreements, he foresaw that "the experience of future years will show us how they can be improved."

That experience is now part of our history.

The very success of the system in stimulating trade has put new pressures on the Bretton Woods machinery and shows us how that machinery must now be changed.

The rapid growth in world trade and in the flow of capital is outpacing the growth in monetary reserves. The world must take action to provide sufficient reserves for this growth. If it does not, strains and uncertainties in the international monetary system-and the limitations they create--could turn the clock backward to the dark days of restrictive economic policies, narrow interests, empty ports and idle men.

Today I propose that the United States lead the way in the action that is needed. I recommend that the Congress approve changes in the International Monetary Fund Agreement to create a new form of international reserve--the Special Drawing Right.

BACKGROUND TO ACCEPTANCE

The request I make today is not a hasty solution to a newly-discovered problem. It represents the careful work of five years.

The first part of that period was devoted to intensive study by the outstanding economists and financial specialists of many nations.

This laid the base for action. In July 1965--with bi-partisan support and suggestions from the Congress--I directed the Secretary of the Treasury to initiate negotiations. The past three years have been marked by steady progress through patient negotiations--in The Hague, in London, in Rio and in Stockholm.

From the studies and the negotiations has emerged the concept of Special Drawing Rights as a new system for the deliberate and orderly addition to international reserves. They are the refined product of thoughtful and considered agreement among leading experts from the treasuries and central banks of the Free World and the International Monetary Fund.

Throughout the negotiations leading to the development of the Special Drawing Rights plan, the Secretary of the Treasury had the benefit of advice from the Advisory Committee on International Monetary Arrangements. This panel, chaired by former Secretary of the Treasury Douglas Dillon, consisted of some of the nation's leading bankers, economists and businessmen with outstanding experience in the field of international finance.

THE NEED FOR INTERNATIONAL RESERVES

International reserves are to world trade what working capital is to a growing business. As trade expands--just as when business grows--more reserves are needed.

Nations use international reserves to settle their accounts with each other. And these reserves are an important factor in maintaining stable exchange rates among currencies. They are essential to provide time for countries to restore equilibrium in their balance of payments through an orderly process of adjustment.

Reserves must be unimpeachable in quality. They must be acceptable to other nations, as well as to the nation that holds them. Traditionally, international reserves have consisted mainly of gold, dollars and sterling.

But today the world's supply of international reserves cannot meet the requirements posed by growing world trade and capital flows.

In 1948, total world reserves were $48 billion. Of this, gold accounted for $33 billion, or almost 70 percent. The remaining 30 percent was divided among dollars--6 percent--and other foreign exchange plus reserve claims on the International Monetary Fund.

Today, reflecting the vast increase in world trade, total reserves have grown to $73 billion. Of this, gold accounts for $39 billion, a decrease to 54 percent of the total. Dollars, on the other hand, have risen to 25 percent---or $18 billion. The remainder is divided between other foreign exchange and reserve claims on the International Monetary Fund.

Gold became less and less dependable as the source of regular addition to world monetary reserves. Because the U.S. was running a balance of payments deficit, the dollar took up the slack left by gold and provided the largest share of the new reserve growth over the past two decades. Thus, the growth of world reserves has been linked mainly to deficits in America's balance of payments.

With gold unable to meet reserve needs, and with the prospect of reduced dollar supplies for international reserves as the U.S. moves toward balance of payments equilibrium, one fact clearly emerges: the world needs some new form of acceptable international reserve to supplement existing reserves.

It is the purpose of Special Drawing Rights to fill that need.

THE SIGNIFICANCE OF SPECIAL DRAWING RIGHTS

International agreement on the Special Drawing Rights proposal comes at a time when the world monetary system has been subjected to uncertainty and speculation following the devaluation of the pound sterling last November.

To all nations of the free world, this agreement will bring new strength.

To the United States, it can provide an opportunity to rebuild gradually the reserves which we have lost over the past years. But in a broader sense, the Special Drawing Rights are of value to the United States because of the strength they will bring to the world monetary system.

As the world's largest trading and investing nation, we prosper where other nations have adequate resources to assure their expansion of production, employment and trade.

These Special Drawing Rights are a landmark in the long evolution of international monetary affairs. For the first time a reserve asset will be deliberately created by the joint decision of many nations. These nations will back that asset with their faith and resources--the strongest support that any asset has ever had. Special Drawing Rights will assure the world economy of an adequate and orderly growth of international reserves, regardless of unpredictable fluctuations in the production of gold or in its private use.

HOW THE SPECIAL DRAWING RIGHTS WILL WORK

Special Drawing Rights--to be issued only to governments, and exchanged only among governments--will be a special kind of international legal tender. They will perform the same basic function in the international monetary system as gold, dollars, or other reserve currencies. They will carry a gold value guarantee and will bear a moderate rate of interest.

Special Drawing Rights will be created after careful consultation and broad agreement. Participating countries with 85 percent of the weighted votes must decide that a need for additional reserves exists.

This process will assure wide participation in the use of the new asset and confidence in its acceptability.

These new reserve assets will be distributed in accordance with each member's quota in the International Monetary Fund. Under this arrangement, for example, the United States--whose quota is about 25 percent of the International Monetary Fund's resources--would receive about $250 million out of each $1 billion of Special Drawing Rights issued. The share of the Common Market countries as a group would be about $180 million; the United Kingdom, $115 million; Canada and Japan, about $35 million each; other developed countries, $105 million; and the developing countries as a group, $280 million.

A participating country will benefit from the program, but it will have responsibilities as well. It is committed to accept Special Drawing Rights from other countries when it is in a strong balance of payments and reserve position. The amount it is required to accept is limited to three times the value of Special Drawing Rights distributed to it by the International Monetary Fund. This limitation is sufficiently broad to assure effective use of the new asset.

The commitment to accept Special Drawing Rights from other countries insures their high quality and liquidity, and gives them the status of a true international reserve asset.

The machinery to create Special Drawing Rights will be put into place when 65 International Monetary Fund member-nations accounting for 80 percent of the weighted votes accept the plan.

As one of the leaders in the formulation of this proposal, and as the member with the greatest percentage of the votes--about 22%--it is fitting that the United States be one of the first nations to accept the Special Drawing Rights plan.

OUR HOPE FOR TOMORROW

International finance--the subject of this Message--is complex and intricate.

But its effects extend far beyond monetary institutions. They reach out to farmland and production line, sales office and show room.

For the heart of this message is a plan to sustain a prosperous and growing world economy through an orderly expansion of trade. As that occurs, we all benefit--the worker with a better paycheck, the businessman with a new order, the farmer with another market, the family with a wider choice of products.

As the world's economy grows, a promise grows with it. Franklin Roosevelt defined it almost a quarter of a century ago in his first message on the Bretton Woods Agreement--as a hope "for a secure and fruitful world, a world in which plain people in all countries can work at tasks which they do well, exchange in peace the products of their labor, and work out their several destinies in security and peace; a world in which governments, as their major contribution to the common welfare are highly and effectively resolved to work together in practical affairs . . ."

That was the hope of America then. It is the hope of America now.

The Congress can move far toward making this hope a reality by its contribution to a sound world monetary system.

I urge the Congress to cast a vote for a stronger world economy by approving the historic Special Drawing Rights legislation I submit today.

The key role of the dollar also gives America another special responsibility. A strong dollar is essential to the stability of the international financial structure. We must fulfill our responsibilities by dealing swiftly with our own budgetary and balance-of-payments deficits. Let me remind the Congress once again of the clear and critical need to pass the tax bill--the best investment America can make to keep the dollar strong.

LYNDON B. JOHNSON

The White House

April 30, 1968