ECONOMIC

What Pressures Should Be Exerted on Countries?Once an obligation is established for countries to act in a timely fashionto remove payments imbalances, the question arises what, if any, pressuresought to be exerted on countries that fail to carry out their obligations. TheBretton Woods Agreement provided mainly for pressures on deficit countries,insofar as the credit facilities of the Fund were made contingent on a findingby the Executive Directors of the IMF that a country was taking adequatesteps to remove the deficit in its balance of payments. Under currentarrangements the strongest pressures are those exerted by the foreign exchangemarket. Attempts by a government to prevent an adjustment of theexchange rate in the face of a persistent surplus or deficit tend to triggerlarge speculative movements, and these in turn exert strong automaticpressure that countries have found difficult to ignore. The Chairman of theCommittee of Twenty has indicated that a reformed system will provide forgraduated pressures to be applied by the international community on bothsurplus and deficit countries in cases of large and persistent imbalance. It hasnot been agreed in the Committee of Twenty, however, what those pressuresought to be and how they ought to be activated.The Convertibility IssueAnother issue under discussion is the convertibility of national currenciesinto primary reserve assets such as SDR's and gold. This particular use ofthe term has to be distinguished from the exchange of one currency intoanother in the foreign exchange market. The issue of convertibility intoprimary reserve assets arises primarily in the context of an agreement to limitfluctuations of exchange rates by government intervention in the foreignexchange market. If a surplus country is obligated to buy the currency ofa deficit country to forestall a decline of that currency in the foreign exchangemarket, the question arises to what extent the deficit country oughtto buy back its currency with primary reserve assets. One argument in favorof such a requirement is that it limits the extent to which a surplus countryis obligated to finance another country's deficit. Another argument is thatit puts some pressure on the deficit country to accept "financial discipline"insofar as its deficit is due to excessively loose domestic policies.Under the Bretton Woods system all countries except the United Statesintervened in the foreign exchange market to carry out an obligation tokeep their exchange rates within internationally agreed margins. Since thecurrency used for such intervention was generally the U.S. dollar, the dollaritself was kept fixed in foreign exchange markets by the intervention ofother central banks. The United States, in turn, accepted an obligation toconvert dollars into gold or other reserve assets upon demand. The UnitedStates finally suspended this convertibility of the dollar into primary reserveson August 15, 1971, though the dollar remained convertible into othercurrencies in the foreign exchange market. Inconvertibility came afteran extended period during which the American gold stock was very small206