Federal Reserve Chairman Paul A. Volcker has warned the House Banking Committee that a restrictive amendment it has included in legislation enlarging the U.S. commitment to the International Monetary Fund could "adversely affect the functioning of the international monetary system."
Using unusually strong language to show "the strength of my concern," Volcker wrote committee Chairman Fernand J. St Germain (D-R.I.) May 6 that the House version of the bill could severely limit the IMF's use of Special Drawing Rights (SDRs) to cope with the current world debt crisis. A copy of the letter has been obtained by The Washington Post.
Volcker said the amendment "might be interpreted as a United States attempt to cripple the SDR and weaken the IMF at the very time we are trying to strengthen" the international lending agency. He added that "the SDR has taken on a symbolic importance beyond the volume of SDRs that has been created, and it potentially could play a significant role in a more stable international monetary environment."
Special Drawing Rights are a paper international asset created by the IMF and distributed to members, who then can use them like currency. The value varies, but currently each SDR is worth about $1.08. All told, the IMF has created and distributed to member nations about 21.5 billion SDRs over the past 14 years.
The controversial amendment is contained in legislation appropriating an additional $8.4 billion for the IMF. Specifically, the amendment, offered in committee by Rep. Stephen L. Neal (D-N.C.), would require advance congressional authorization for any vote by the U.S. representative to the IMF board to approve a new allocation of SDRs.
The bill is scheduled for a floor vote in the House on Thursday. House Democratic leaders have warned the administration that Democrats, in a block, won't support the bill unless Republicans guarantee that a majority of their party will go along with the administration's own proposals for the $8.4 billion increase.
High-ranking Treasury officials concede that they have been unable to offer such a guarantee. "The outcome of the bill is in doubt," Treasury Secretary Donald T. Regan said.
In the bitter debate surrounding the legislation, opponents have argued that the additional money appropriated for the IMF would be used to "bail out" overcommitted banks, while advocates have warned that without it, some Third World countries may declare a moratorium on their staggering debts that could trigger a new global depression.
A high-ranking IMF official told The Post that the amendment "would put the SDR, as an asset, to sleep." The reason is that under the IMF's rules, an 85 percent majority is required for creation of SDRs, and the present U.S. quota (its deposits in the IMF) gives the United States close to 20 percent of the voting power. Thus, without U.S. assent, SDRs cannot be created, and a delay caused by argument in Congress over whether to approve an SDR vote by the U.S. delegate to the IMF could be critical during an economic emergency.
A House Banking Committee source said there was no discussion of the amendment by the full committee, and therefore little to indicate whether there are strong feelings among committee members.
The House bill would boost U.S. quotas to the IMF by 48 percent, or about $5.8 billion. The bill would provide another $2.6 billion for a special "crisis" fund sponsored by the United States and other rich nations. The $8.4 billion infusion would be part of a total increase of $32 billion in IMF resources voted earlier this year by the fund's 145 member countries, subject to approval by their legislative bodies. Neal's rationale for the amendment is based on worries that excessive creation of SDRs might lead to a regeneration of inflationary conditions throughout the global economy. He argues that, in contrast to quota increases for the IMF, which provide the basis for making loans with strict conditions to members, SDR creation provides unconditional resources to borrowers.
The House Banking Committee report on the legislation said that both quota increases and SDR creation "are mechanisms through which United States credit can be channeled, through the IMF, to foreign governments." Yet, the report added, there is no scrutiny "of the justification for the loan" by the IMF or governments like the United States that supply the credit for SDR creation.
IMF officials respond that although this is factually correct, SDR creation already is limited by law, and carried out only after consultation with Congress.
In his letter, Volcker said, ". . . I should emphasize that the interests of the United States in the health of its own economy, as well as in the smooth functioning of the international monetary system, might at times be well served by a prompt, positive U.S. decision on SDR allocation, for example, to forestall a global contraction of aggregate demand or to promote sustainable, non-inflationary economic growth and recovery in the face of a contraction in global liquidity . . . . "
Volcker said he would support legislation that formalizes existing consultation procedures, or even new limits on the amount of SDRs that could be issued without specific congressional authorization. But he added that "the crucial" thing is to maintain the IMF's ability to respond to emergencies.