Journal Issue

The Fund Meeting

International Monetary Fund. External Relations Dept.
Published Date:
December 1965
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International Liquidity

There was a strong consensus among Governors on the importance of improving the international payments mechanism, although there were differences as to the urgency of agreeing on the shape of the reform. Most Governors agreed that the function of the world’s monetary system was to facilitate and to ensure an adequate expansion of world trade; thus all member countries, both highly industrialized and developing, had a common and vital interest in the reform of the system. Governors for several countries welcomed the increase in the Fund’s resources which would result from the Fourth Quinquennial Review of Quotas, but the Governor for the Philippines indicated that this would at best provide a short breathing spell. Some Governors referred with apprehension to the moderate fall in the world’s reserves in the first half of 1965, which the Managing Director of the Fund, Mr. Pierre-Paul Schweitzer, had mentioned in his opening address; the Governor for Israel said the world was faced with the danger of a deflationary crisis in the developed countries, because of an impending shortage of liquidity. The Governor for Canada emphasized that the time had come to “increase the tempo of our work. We cannot wait until the need for action is upon us before reaching agreement upon the most appropriate solution.” While many Governors felt that there was no immediate shortage of international means of payment, it was considered opportune to prepare for the future. It was agreed that on the ending of U.S. balance of payments deficits, a substitute or supplementary form of reserve asset, to facilitate the smooth expansion of world trade, would be necessary. As seen by the Governor for the United States, the problem was whether it would be possible “in the years ahead … to increase the reserves in our international monetary system sufficiently and in season to be certain that the sound employment of the world’s economic resources for growth and improvement is not crippled by inadequate financial means.” Among those who attached the least urgency to the need for reform, the Governor for the Federal Republic of Germany, while expressing his belief that the danger was that of inflation, not deflation, and of an excess rather than a shortage of liquidity, indicated that his Government agreed to “contingency planning with a view to providing suitable machinery for increasing liquidity if the need for it were really to arise.”

Contingency planning was also the subject of a communiqué issued on the second day of the Annual Meeting by the “Group of Ten,” comprising the ten countries participating in the General Arrangements to Borrow. The final paragraph of the communiqué stated that “as soon as a basis for agreement on essential points has been reached, it will be necessary to proceed from this first phase to a broader consideration of the questions that affect the world economy as a whole. They (the ten countries) have agreed that it would be very useful to seek ways by which the efforts of the Executive Board of the Fund and those of the Deputies of the Group of Ten can be directed toward a consensus as to desirable lines of action, and they have instructed their Deputies to work out during the coming year, in close cooperation with the Managing Director of the Fund, procedures to achieve this aim....”

The Governor for Italy, speaking at the Fund Meeting on the day before the communiqué of the Group of Ten was issued, explained his feeling that “any intergovernmental agreement will have to be preceded by careful preparation among the countries most concerned....” This thesis was later expanded by the Governor for the Federal Republic of Germany. Similarly, the Governor for France considered it opportune that the search for a solution be undertaken by the Group of Ten, but said that “assuming that a solution could be worked out, final approval of the Group’s findings should be subject to a joint scrutiny by the other countries.” Other Governors from the Group of Ten countries felt that the rest of the Fund’s members might be brought into the discussion at an earlier stage. After welcoming the fact that the Fund would be actively participating in the first stage of preparation, through the representatives of the Managing Director, the Governor for the United States looked forward to a second stage, which “should be designed primarily to assure that the basic interests of all members of the Fund in new arrangements for the future of the world monetary system will be adequately and appropriately considered and represented before significant intergovernmental agreements for formal structural improvements in the monetary system are concluded.” The Governor for the United Kingdom, also, took the communiqué to mean that, “at the next stage, countries which are not included in the earlier discussions will be brought fully into the picture before there is any final enactment of such new arrangements as may be agreed.”

Governors for countries outside the Group of Ten were virtually unanimous in opposing a procedure whereby the discussions would be restricted to a small group. The Governor for Australia expressed sentiments which were echoed in other Governors’ speeches, when he warned that “I speak now as one of more than 90 countries who are not included in the membership of the Ten. I must say that it would be quite unacceptable to us to be confronted with a fait accompli, giving us no reasonable opportunities for expressing our views in a manner which permitted these views to make some impact. The Group of Ten, whatever its voting strength, can in no sense claim to be fully representative of this world institution nor, I imagine, would it claim to be so.” The Governor for Nigeria objected to the problem of international liquidity being regarded as the sole concern of the industrialized countries, and even among them, of only ten major countries. The developing countries were equally important for world trade, and should, he felt, be fully represented on any working group charged with the duty of formulating new proposals. The Governors for most developing countries took a similar position.

The Governor for Iran noted that “international liquidity, long considered a rich nation’s problem, is now becoming increasingly tied up with the problems of the poor. The rich man’s sneeze often gives the poor man a bad cold.” He supported the proposal for a world monetary conference, which he believed would have a much better chance of finding wide acceptance of a solution to impending problems than any exclusive conclave of richer countries. Regarding procedure, he felt that it might be easier for the preliminary steps to be taken by a few countries, although the final review and ratification should encompass membership-wide participation. Many Governors supported this view.

Mr. Schweitzer’s reminder that “International liquidity is the business of the Fund,” was widely supported by Governors. Most Governors felt that any new reserves media should be at least connected with the Fund, if not incorporated into the Fund, and in this they were joined by several Governors for Group of Ten countries.

On the shape of the reform itself, there was less discussion and less disagreement. The Governor for the United Kingdom suggested that “a careful reading of the Ossola Report leads to the conclusion that positions which may seem very far apart are in fact preferences about different ways of achieving the same end. The differences should not be irreconcilable.” Several Governors indicated their preference for the techniques described by the Managing Director in his opening address, such as an extension of quasi-automatic drawing facilities beyond the gold tranche into some part of the credit tranches, and an operation whereby the Fund would simultaneously obtain special assets and assume additional liabilities. The Governor for Italy, while noting that the fundamental issues involved in the process of reserve creation were political in their nature, devoted considerable attention to the technical aspects. He concluded that “We would, therefore, favor a system under which the new reserve assets were administered by the Fund in a separate account.”

Many Governors for developing countries shared the view of the Governor for Iraq that “any plan to increase liquid reserve assets should take into account the special needs of developing countries. … In this decade of development, the Fund should make its contribution by paying special attention to the problems of developing countries.” The interconnections between the economic fortunes of developing and advanced countries were frequently stressed, and Governors warned of the adverse effects which a shortage of liquidity would have on the free flow and steady expansion of trade, and its potential threat to the provision of economic aid by donor countries.

Problems of Developing Countries

The role of the Fund as the prime provider of balance of payments financing for countries with small reserves, and as a multilateral institution in which the interests of 103 member countries in all stages of development were represented, was a common topic in Governors’ speeches. In Mr. Schweitzer’s opening address, he mentioned his hope that in the not too distant future he might be able to report improvements in the Fund’s compensatory financing facility, which provides balance of payments financial assistance to compensate export shortfalls experienced by countries exporting primary products. Governors for primary producing countries stressed the need for improvement in this type of assistance. The Governor for Argentina, speaking on behalf of 19 Latin American republics and the Philippines, recognized that the present compensatory financing scheme was a contribution toward the partial solution of this problem, but stressed the need for improvements. He suggested that the compensatory tranche be considered an addition to the normal credit facilities of the Fund, and that it be enlarged from 25 per cent of a member’s quota to 50 per cent; and he noted that the nonautomatic nature of drawings had resulted in subjective assessments in the determination both of the amount to be compensated and the circumstances of the loss of income. The Governor for Afghanistan referred to the recent fall in basic commodity prices as likely to lead to an increased need for compensatory financing, while the Governor for Ceylon urged that this type of assistance should be provided for a decline in the terms of trade of a country, rather than for a fall in its export earnings alone.

The other aspects of the problems of developing countries which most concerned Governors in this discussion of the Fund’s role, were suppliers’ credits and the related question of excessive debt burdens, tied aid, and the fiscal problems of less developed countries. These were areas which the Managing Director, in his opening speech, mentioned as being of growing interest to the Fund. He laid particular emphasis on the problems resulting from the growing external debt burden of the developing countries, which in an increasing number of instances had disrupted the balance of payments, checked necessary capital inflows, and halted economic growth. He pointed to the equal responsibility of the capital exporting countries, especially as regards their duty not to impose unrealistically short-term conditions. The Governor for Kenya referred to the difficulties facing developing countries that yield to the temptation to accept contractors’ credits in order to speed up their investment programs, and called on the Fund to use its influence to persuade certain creditor countries not to endorse or facilitate lendings on terms clearly implying repayment difficulties. The Governor for India welcomed the Fund’s activities in the field of developing countries’ debt burdens, but added “it would be far more rational and conducive to greater confidence all round to recognize squarely that from time to time there arises a genuine need for medium-term and perhaps even longer-term liquid funds and that there should be arrangements for meeting this need directly. I, for one, do not see why the Fund should not … enlarge the family of international financial institutions by setting up at least a separate international stabilization fund for meeting the genuine need for medium-term liquid finance.”

The fiscal problems of developing countries, which had become of particular concern to the Fund in recent years, leading to the establishment of the Fiscal Affairs Department, were also dwelt upon by many Governors. The Governor for Afghanistan, for example, said that the revenue systems in most developing countries could not mobilize sufficient funds to support the necessary and increasing levels of public expenditures. Thus, budget deficits became a persistent feature of development, and were in turn the most important cause of balance of payments problems. He felt that the Fund could provide important technical assistance in this field through the Fiscal Affairs Department.

In his closing remarks, Mr. Schweitzer noted particularly the comments on compensatory financing by Governors for developing countries, and said that careful consideration would be given to the possibility of further progress in providing this form of assistance. On liquidity, he spoke of the progress achieved, in terms of the commitment to accelerate the search for a satisfactory solution, and in terms of a clearer understanding of the direction in which such a solution would have to be found. He welcomed the clear consensus, apparent from the comments of Governors, that international liquidity concerned all countries, that the interests of all members could best be reconciled by international discussion in the Fund, and that general action to deal with the problem of liquidity should be taken within the framework of the Fund.

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