THE JAMAICAN AGREEMENT

The Outline of Reform had explored goals of symmetry, reviewing members’ internal
policies and indicators, and sanctions. This unfinished agenda was to maintain a general
understanding of the interdependence in combination with a stable and adjustable
exchange rate mechanism. Its focus centered upon exchange rates, quotas, and gold.

In January 1976, an interim committee met in Kingston, Jamaica. The major western
powers formalized a set of amendments to the Articles of Agreement of the Fund at that
time. The focus of three essential issues that were resolved is contained in Article IV,
Obligations Regarding Exchange Arrangements.

One issue was the framework of the Fund and fixed exchange rates. Secondly, gold in
the original Articles of Agreement was the point at which currencies were pegged;
pegging to the US dollar was merely one step removed from pegging to gold. This
second issue brought in to context just what the role was to be of gold in the revised
international monetary system. Thirdly, the Special Drawing Rights implemented had
been created to provide a mechanism to deal with the reserve issues and the thrust was
how its function was to continue and develop.

Pursuant to the Amended Articles of Agreement, a system of stable but adjustable

exchange rates evolved. The amended articles mandated that members establish an
exchange rate and defend it. Its implementation provided members with different
options to achieve this result. This revision by amendment provided that the Fund
Articles of Agreement prohibited a currency to be pegged to gold. The drafters of the
Jamaican Agreement made that fundamental change, removing gold from the
mechanism.

Gold remained as a reserve asset. Holders of gold were unwilling to view gold as a
monetary asset against which currencies were to be fixed. The reason was that it would
imply that asset would not be a tradable asset whose price could be determined by the
market. There was not a reasonable possibility of removing gold’s function as a tradable,
marketable asset within the market price. Gold had exceeded in price the fixed
monetary value that had been established initially and governments were not able to
treat it as possessing special monetary function against which currencies could be
pegged.

Gold however was nonetheless an asset and it was to continue as a reserve asset. It
became possible with the Jamaican Agreement for governments to not have restrictions
upon official trading. Gold under this revision was enabled to be treated not just as a
monetary reserve, but also a tradable asset. That enabled it to be utilized to balance
deficits, for sales to generate revenue, in addition to being a reserve asset for balance of
payment purposes.
The core principal that governed the concept of floating exchange rates was an
emphasis upon the notion that stability of domestic economies was necessary to
implement stability of currencies. Exchange rate stability was dependent upon good
fundamental conditions in domestic economies as opposed to an insistence of
international commitments to maintain stable exchange rates. Stability of exchange
rates is not necessarily achievable by an international agreement, the national
economies are affected by instability and inflation.

That a currency could not be pegged to gold, the Jamaican Agreement allowed for three
basic options to address this principal of what was required to enable a proper
functioning. One such option enabled a member to opt for the maintenance of a value
of its currency in terms of special drawing rights or other denomination, other than
gold. A second option was a cooperative arrangement that enabled members to
maintain the value of their currency in relation to the value of the currency or currencies
of other members. Lastly, a participant-member was enabled to instead engage in an
exchange arrangement of a member’s choice. It was the objective when selecting an
option, to fulfill the basic philosophy set forth in Section 1 of the Article IV, to establish
stability.

If an economy elects to peg their currency against another currency election carries with
it the responsibility that necessitates intervention in the market to defend its value in
terms of fluctuation of the currency to which it floats against. To understand this
concept, view the relation of the US dollar to the Euro. If the US dollar is not strong
against the Euro, in what manner is that determined an in what way is realignment
achieved and necessary? If realignment of a currency is necessary, how is that
accomplished?

Provision is accepted pursuant to these alternatives for Fund surveillance. Previously

under the fixed par value mechanism, surveillance, though not termed that, was
implemented by the rule disallowing competitive devaluation. The parity was not to be
changed except as required if a fundamental disequilibrium occurred. Under the regime,
the Fund would review the proposed parity suggested by a particular economy. Under
this new system of floating exchange rates surveillance by the Fund that was
contemplated was directed at the full range of government actions that impact the
relative values of currencies. The valuing of currencies relative to another currency then
references that option to Fund surveillance. This arrangement for maintaining the
relationship between currencies and the role of the Fund, contemplates cooperative
interaction between participant-members whose currencies are valued in relation to
each other.

The role of the Fund regarding the supervision of the workings of this cooperative
arrangement is embodied conceptually in Section 1 of Article IV. The core is the
recognition that the essential purpose of the international monetary system is to
provide a framework facilitates the exchange of goods, services, and capital among
countries. That implies a sustained sound economic growth. A principal objective is the
continuing development of the orderly underlying conditions that are necessary for
financial and economic stability.

Each member undertakes to collaborate with the Fund and other members to assure an
orderly exchange of arrangements to promote a stable system of exchange rates. This
involves the endeavor to direct its economic and financial policies toward the objective
of fostering orderly economic growth with reasonable price stability, with due regard to
its circumstances. Additionally it is to seek to promote stability by fostering orderly
economic and financial conditions and a monetary system that does not tend to
produce erratic disruptions.

A third basic objective is to avoid manipulation of exchange rates of the international

monetary system. This seeks to prevent balance of payments adjustments to gain an
unfair competitive advantage over other members and follow exchange policies
compatible with this undertaking.

The role of the Fund pertaining to surveillance contemplates a cooperative arrangement

of those principles. Particular note should be made to the emphasis given to the impact
of valuation upon trade relations. The mechanics for a systemic and cohesive framework
to enforce these principles requires a certain level of surveillance. In the principles that
have been articulated pertaining to a proper relationship between valuations of
currencies, it has been advocated that the Fund should be actively involved in the
surveillance of government’s pricing policies regarding each of the currencies.

The Interim Committee in Communiques of Eight Meeting of Interim Committee,

Washington, April 28-29, 1977, noted that the principles and procedures of the
Executive Directors that were endorsed would make an important contribution to the
effective functioning of the international monetary system. That statement specifically
directed itself to the implementation of Article IV and principles stated. Those principles
and the content of the article required the Fund to be actively involved in surveillance
and oversight of members’ practices in the valuation of their currency. This supervision
could not be left to the willingness of the states to comply with their treaty obligations
under the guise of goodwill; rather it necessitated a mechanism for continuous review.

The purpose of a surveillance mechanism of the Fund is to assure that governments

manage their floating currencies in such manner as to come within the spirit of Article
IV, purposes advanced in the Amendment to the Articles of Agreement. This surveillance
could be viewed as having provided authority to the Fund in an over-reaching manner. It
provided authority over economic conditions within a state and that it is appropriate to
compare measures in a review for Special Drawing Rights.

The SDR authority enabled the Fund to negotiate the manner in which it conducted
intervention in managing its economy to achieve stability.
Additionally, the Fund is actually enabled to articulate the steps it deems necessary to
achieve a result. That articulation is actually set forth in the letter of undertaking sent to
the participant-member by the Fund as a condition to obtain the stand by credit. This
surveillance provides authority that exceeds that level.

The authority of surveillance over exchange rate policies promulgated basic principles. It
can be viewed as less intrusive than originally contemplated in the Plan of Reform
drafted in preparation of the Jamaican Agreement forum. The principles agreed upon in
the Jamaican Agreement by the Amendment to the Fund Articles of Agreement were
not as cohesive and effective. The role of the Fund was reduced. The reason believed by
some was because there was an unwillingness of governments to vest in the Fund the
level of authority over their economy that was contemplated in the reform draft.
Participant-members were willing to accept the continuous surveillance mechanism, but
not the enforcement policy as set out in the Plan of Reform.

The Jamaican Agreement addressed how currency was to be valued and the change of
the role that gold played in the system. But of importance is how the Jamaican
Agreement affected Standing Drawing Rights. These Special Drawing Rights were
created in response to solving a need to create a means to increase reserves. That
originated from the bloat in reserves from deficit position of balance of payments by
major players in the international monetary system.

In theory, if those industrial economics were to balance their extraordinary balance of

payment’s deficits, the amount of reserves created from the bloat and then reduced
contracts reserves. Excess deficits create reserves. The SDR was created to alleviate this
dilemma by virtue of a bookkeeping entry, the SDR. Its creation was to address a lack of
liquidity that could result without a reserve asset to offset shifts in balance of payments.

Reserve assets were not sufficient to maintain the necessary growth for international
trade. All these factors were intertwined in the contemplation of this major revision to
the original Bretton Woods Agreement.

SDR’s had under this creation, a debt characteristic because interest is paid and earned
on balances. Additional SDR’s were not created every year, but the authority of the
Fund to do so existed. Pursuant to the original authority granted to the Fund, SDR’s
were allocated among all participant-members of the Fund at such time as the Executive
Directors authorized an SDR allocation. The SDR’s were allocated among Fund
participant-members in accordance with their subscriptions to the Fund. Their primary
function of use pursuant to the original Articles of Agreement were for the purpose of
payment of balance of payments.

The Jamaican Agreement amendment to the original Articles of Agreement expanded

the use to which they could be applied. This amendment allowed for their use beyond
balance of payment, payment. It provided, additionally, that SDR’s could serve a
function as a unit of account for the international system. It expanded its use
significantly by enabling governments to engage in SDR transactions without Fund
approval; they were enabled to make the uses for purposes that they deemed
necessary.

The second major change in the Jamaican accord was that the SDR could be held not
only by member governments of the Fund, but added the authority of additional parties
that could be holders. Those were designated as prescribed holders. Prescribed holders
were regional, multinational states that perform central banking functions. They, along
with participant-members of the Fund, became entitled to be holders of SDR’s.

The prescribed holders were not allocated SDR’s in an SDR allocation, but just
empowered under the new accord, to be holders.

Also at that time, SDR’s became valued in terms of the five currencies; those were the
Deutsche mark, (21%), the French franc (11%), the Japanese yen (17%), the Pound
sterling (11%), and the United States dollar (40%). The valuations are revaluated at the
end of each calendar year and the fractional allocation was also re-determined. On a
daily basis, the value of the SDR was computed with reference to those exchange rates
of currency. Naturally the advent of the European Euro has changed this inclusion
formula.

A similar concept is used to periodically establish interest rates of the SDR. This enables
participant-members, among other purposes, to exchange SDR’S for currency that is
needed to shore up balance of payments. This done without the exercise of
conditionality; conditionality does not attach to acquiring currency SDR’s. Rather it
attaches to the use of a participant-member’s credit position in the Fund, borrowing
against the Fund. A participant-member is required only to stay within SDR limits.

It is important to recall the premise of the SDR; it was created as a reserve asset. As a
reserve asset, it was to be available without Fund condition. The theoretical concept
underlying the lack of conditionality was the notion that the SDR was a reserve asset, it
had to be unconditionally available, otherwise a country could not account for it as part
of its reserves. By virtue of this ability to expand the use of the SDR, the Fund became a
major lending institution to be compared with commercial banks in some respects. This
was certainly true with respect to competitive interest rates.

The SDR was functioning to make available to developing countries, currency at an

interest rate that was calculated in accordance with the interest that the market
determines with respect to obligations nor of developing countries. That provides a
distinctly lower rate for a developing country than would be obtainable from market,
commercial financing. It is based upon a calculation utilizing the major industrial
countries that the Fund incorporates in their calculation.
The significance is this. In the case where a developing country has a need to acquire
foreign currency to balance their balance of payment, various alternatives are available
to them. Basically, it is qualifying through the Fund process if the amount sought
exceeds the credit allocated of SDR’s or as an alternative, seeking the same credit from a
commercial bank loan. A principle to understand is that in the monetary system, the
SDR’s have by this concept taken on a characteristic of a competitive source of capital. A
new allocation of SDR’s by the IMF will add competitive pressure for commercial banks
and replace commercial banks for bank lending for balance of payment purposes with
respect to developing economies. Thus major industrial core countries may desire to
limit new SDR allocations. A recent trend has been that the SDR has taken on a far less
active participation of this monetary system composition. This could in fact be the
underlying reason.

Another reason asserted for not desiring additional SDR allocations is that it creates a
demand against Fund resources; it sets the stage for the possibility that the Fund’s
holdings of hard foreign currencies could become insufficient to meet the demands
made against the supply. A massive new allocation in effect extends credit to all
developing economies. That can come at a perilous cost, an interest cost. Interest is not
based upon credit worthiness, but in relation to the major currencies that make up the
basket of SDR calculation value.

Despite this lower interest rate, developing economies have been inclined to obtain
commercial bank loans at a higher rate. One reason maybe that in order to process a
Fund loan, a developing economy would be required to obtain a stand by arrangement
even more compelling reason appears to indicate that their reluctance is in
consideration of the fact that it subjects itself to surveillance of its internal economy.
That is something that developing economies wish to avoid.

There is an additional, political twist to the SDR’s and new allocations. It re requires
major participant-members, such as the US, to provide additional funding which in turn
increases the international power of the IMF. One would want to connect this concept
up with the underlying structural voting system. The major participant-members have
voting rights attributable to these higher account holdings. In the international
community, the idea has often been floated that the US exerts its industrial mite in the
international monetary system though these indirect influences enhanced by this
participant-membership structure.

In summary SDR;s are in reality a new form of money that can be utilized by central
banks and governments to settle international debts; a Fund created mechanism via a
bookkeeping entry. They are valued in terms of a weighted average of exchange rates of
currencies. International contracts are even now drafted specifying US dollar equivalent
of SDR’s because the value of the SDR is very stable in terms of worldwide purchasing
parity. And their use and purpose has been greatly expanded with the Jamaican
Agreement or Second Amendment as it is often called.
Implicit in the Jamaican Agreement was the structure of the floating exchange rate
mechanism. A floating exchange rate mechanism was to unpeg to a fixed value and
allow currencies to float freely. In concept the floating was to be influenced with supply
and demand of each participant-members currency, pegged as previously stated to
another’s currency or by other option.

There was hope that floating rates would end persistent balance of payment deficits
without destabilizing the economy in the process. With respect to the US, that has not
been the case. It has resulted in bouts of inflation due to cost-lush and demand-pull,
exacerbated by the depreciation of the US dollar. In cycles, the US has experienced a
falling US dollar in the international market place, a rising domestic price level, and a
balance of payments deficit larger than ever before.

However, a deficit economy within a floating exchange system is enabled to continue to

use monetary and fiscal policies to maintain a prosperous economy. It enables countries
to maintain autonomy to pursue their own independent domestic stabilization policies.
Equilibrium is restored with an instability of the exchange rate rather than an instability
in economies.

Free societies may benefit from the absence of governmental control over pricing that
can be manipulated to achieve political objectives and constrain individual freedom. It
serves to preserve attainment of a power over income redistribution and social
objectives for the reason that it removes it from some direct political manipulation. In a
global economy where governments use discretionary monetary and fiscal policies to
deal with business cycles it is beneficial.

This is because it enables an economy an optimal pursuit of stabilization, free from

balance of payments constraints. There will always be market imperfections and
external facets that prevent an attainment of a flawless efficiency. Therefore, the
floating exchange system is favoured by the view of those that attach great significance
to the social benefits of personal freedom and a deliberative collective action at the
most decentralized level.

In 1973, there was a devaluation of dollar that destabilized the financial market. Hence,
the IMF countries adapt a managed floating exchange rate system with the dollar
remaining inconvertible. Under this system, the member countries were supposed to
allow their currency to float within the agreed band. However, there was a tendency to
indulge in competitive devaluation, which was undesirable as it created destabilizing
conditions. Hence, the members of the IMF met at Kingston Jamaica on the 7 th-8th
January 1976 to resolve the problem and to ensure that the international monetary
system worked in an orderly manner. Thus, the Jamaican Agreement set out some
specific rules to prevent a competitive devaluation of currency among the IMF
members.
Introduction

Right after the collapse of the Bretton Woods System, there was a devaluation of dollar
that destabilized the financial market. Hence, the IMF countries adapt a managed
floating exchange rate system with the dollar remaining inconvertible. Under this
system, the member countries were supposed to allow their currency to float within the
agreed band. However, there was a tendency to indulge in competitive devaluation,
which was undesirable as it created destabilizing conditions. Hence, the members of the
IMF met at Kingston Jamaica on the 7 th-8th January 1976 to resolve the problem and to
ensure that the international monetary system worked in an orderly manner. Thus, the
Jamaican Agreement set out some specific rules to prevent a competitive devaluation of
currency among the IMF members.

The Jamaican Agreement is known to be a far-reaching amendments of the IMF’s Article

of Agreement that ratified the end of the Bretton Woods System that allowed the
floating of the price of gold with respect to the US dollars.

What are the essential issues in Jamaican Agreement?

1. Exchange rates
2. Gold at which the currencies were pegged
3. Creation of special drawing rights

The issues were resolve under Article IV of the Jamaican Agreement that focused on the
obligations regarding exchange arrangements and the outcome were agreed on are still
in place today which makes it material to the banking world.

The outcome of Jamaican Agreement

1. Floating rates were declared acceptable
The most important feature of Jamaican Agreement is the legalization of floating
where according to the agreement; it is prohibited for a currency to be pegged
to gold. Upon the currency cannot be pegged to gold, Jamaican Agreement
allowed for three basic options to the IMF members to enable a proper
functioning:
 Free floating: allow the IMF members to move independently of other
currencies – may be traded by anybody. The system of free floating
provides ample opportunities to judge and trade the currencies. As of
today, the system proves to be the best market available in the world.
 Managed floating: a system of floating exchange rates with central bank
intervention to reduce currency fluctuations by way of selling and buying
currencies. For instance, in 1994, American bought large quantities of
Mexican pesos to stop from rapid loss of the value of pesos.
 Pegged to a currency or a group of currencies (Eg: Brunei pegged to
Singapore) or special drawing rights. SDR – a new form of money that can
be utilized by central banks and governments to settle international debts
 for the purpose of adjusting the balance of payments to favorable
position – helps to reduce pressure on gold and the US dollars in
international transactions. SDR has the characteristic of a debt because
interest is paid and earned on balance. SDR allocated among all
participant members of the IMF and each IMF members that hold SDR
can either exchange the SDR for freely usable currencies by ways of
agreeable swaps that needed to shore up the balance of payments or the
IMF can instruct countries with stronger economies /larger foreign
currency reserves to buy SDR from less endowed members.

Article IV permits the creation of SDR and that includes free floating but IMF
encouraged the practice of managed floating – this allows the exchange rates to
be maintained over considerable periods under the surveillance of the IMF since
Article IV implies the absence of official intervention.

The objectives of having accepted the floating rates are to fulfill the basic
philosophy set forth in the Article of Agreement in order to establish stability and
to avoid manipulation of exchange rates of the international monetary system.

If country A elects to peg its currency against another currency of country B, A

will carry the responsibility of having to defend the value of currency of country
B in terms of fluctuation of the currency.

2. Gold was abandoned as a reserve asset.

As a reserve asset:
 It is not tradable – its price cannot be determined by the market
 Not a marketable asset
 Price of gold exceeded the fixed monetary value – cannot be treated as
possessing special monetary function against which currencies could be
pegged

Under the Jamaican Agreement, governments no longer have any restrictions

upon official trading of gold. It was enabled to be treated as tradable asset:
 It is a monetary reserve. However, it cannot be used for international
transactions.
 Can be used to balance deficits for sales to generate revenue

3. Jamaican Agreement created special drawing rights to create a means to

increase reserves in order to make up for balance of payments. Special drawing
rights are designed as the principal reserve assets in the international monetary
system.
Conclusion
The Jamaican Agreement played an important role in banking today because in the
agreement itself, it addressed the issue on how currency was to be valued and the
change of role that gold played in the system. The world revolves around the floating
rates system which helps to end persistent balance of payment deficits without
destabilizing the economy. The Jamaican Agreement too allows various exchange rate
regimes to be followed today.