The World Payments Situation

The year 1961 was one of general expansion in the industrial countries. In the United States and Canada, industrial production and real national product resumed their upward course during the spring of 1961, following the mild recession of 1960. Expansion continued in Europe and Japan, although at a slower rate than in the earlier year, as production approached the limits of the available supplies of labor and, in some countries, investment demand became less insistent. In the aggregate, world industrial production (excluding the countries in the Soviet area) increased by about 3½ per cent from 1960 to 1961, against 7 per cent from 1959 to 1960; and the value of world trade, which had risen by 12 per cent from 1959 to 1960, increased by some 5 per cent from 1960 to 1961.

Since the recession year 1958, the expansion of world trade has, to a large extent, been in the form of an increase in trade of the industrial countries among themselves. By 1961, this trade was nearly 50 per cent above that in 1958. During the same period, the imports of the industrial countries from the primary producing countries increased by only 15 per cent. Persistent price weakness of primary commodities in recent years was an important factor in the relatively unsatisfactory development of exports of the primary producing countries. The availability of the Fund’s resources was helpful to many of these countries in 1961; in fact, the Fund’s transactions with primary producing countries were larger then than in any preceding year. Drawings by 21 such countries totaled the equivalent of $979 million, and undrawn balances under stand-by arrangements at the end of the year amounted to the equivalent of $495 million, against the equivalent of $383 million at the end of 1960.

It is clear, however, that the postponement for a relatively short period, by means of credit, of the impact of balance of payments difficulties is of limited value to a country unless there is a reasonable expectation that its exports will recover or its import demand will decline. Important contributions can be made to the demand for the products of less developed countries by improved access to the markets for their products, reinforced by a vigorous and sustained expansion in the developed countries. But, for the improvement of their position, the less developed countries will mainly need to achieve a long-run strengthening and broadening of their economies. Progress toward this end is conditioned by many factors, including general and technological education, the provision of sufficient capital from abroad on reasonable terms, and maximum access to the markets of the industrial countries. A no less important condition for sustained development, which is discussed in some detail in Chapters 2 and 3, is that the economy be provided with the solid foundation of sound monetary and fiscal policies. Through its extensive and systematic collaboration with the less industrialized countries to attain financial stability, the Fund continues to work toward the fulfillment of one of its purposes: “… the development of the productive resources of all members.…”

Important shifts in the trade positions of a number of leading countries affected the world payments situation during 1961. Between the first and second halves of the year, the payments positions of the United Kingdom and Germany moved closer to balance, as the U.K. deficit and the German surplus on goods and services were both greatly reduced. At the same time, however, the surplus position of the other industrial countries in Europe showed a sharp increase. In the first half of 1961, the U.S. trade surplus, reflecting a large increase in exports and some decline in imports since 1959, had attained a level sufficient, in conjunction with net receipts on account of nonmilitary services, to cover outlays abroad on military assistance, government grants, and public and private long-term capital; but in the second half of the year, the surplus was no longer sufficient, as imports increased in response to economic recovery, and there was also a larger outflow of capital. Japan’s trade position deteriorated sharply from 1960 to 1961, although an inflow of short-term capital kept reserves rising during the first four months of the year. While there was some improvement in the position of the primary producing countries as a group in the course of 1961, these countries continued to be in deficit on current and long-term capital account throughout the year.

The over-all picture of world payments therefore continued to show certain important elements of imbalance, and it is especially important that the continuing efforts of the two reserve centers, the United States and the United Kingdom, to achieve a strong balance of payments position be successful. The shifts in position that have taken place are evidence, however, that adjustments do take place, even though not always quickly, and that the imbalances evident at any moment of time should not too readily be regarded as symptoms of an incurable malady of the world’s payments structure. But one cannot overlook the conditions in which some of the changes toward balance observed in the past year were brought about. Thus the improvement in the balance of payments of the United Kingdom was due in part to a large decline in imports, associated with some slackening of economic activity; and the reduction in Germany’s surplus on current account reflected in part an upward pressure on wages and prices in that country.

Some progress has been made in dealing with sudden movements of short-term capital, which had been extremely disturbing during 1960 and the early part of 1961. In addition to the impact of certain speculative developments, large differentials in short-term interest rates not offset by costs of forward exchange cover had drawn funds away from the United States in 1960 and early 1961. During this period, for example, roughly $500 million flowed out into assets expressed in sterling and Canadian dollars alone. Since the middle of 1961, however, the conditions in the money markets in the main industrial countries have become less divergent, and there has also been a deliberate and increasing tendency in the industrial countries to influence short-term interest rates in such a manner that they would not induce disturbing capital movements. The discount rates in the main centers have moved closer together. While the U.S. discount rate has stayed at 3 per cent since mid-1960, the rate in Germany has been brought down from 5 per cent to 3 per cent; and the rate in the United Kingdom, which was raised sharply to 7 per cent, to deal with the serious situation in July 1961, was lowered by stages to 4½ per cent by the end of April 1962. When account is also taken of the difference between spot and forward exchange quotations, the profitability of moving funds from one center to another on a covered basis has, on the whole, been greatly reduced in the last two years.

These developments have tended to lessen the inflow or outflow of short-term balances seeking higher returns. Nevertheless, short-term and long-term capital continues to flow, on balance, out of the United States to many areas of the world, while a number of European countries with strong balance of payments positions continue to be net importers of private long-term capital. Throughout 1961 and into 1962, large sums have been borrowed in the United States in the form of bank loans and acceptance credits, especially by Japan. In part, this outflow is due to the fact that interest rates still make borrowing in the United States less costly than in most other markets. In part, it is a reflection of the organization and the breadth of the U.S. capital and money markets, which make the flotation of large loans (of which a substantial part is in fact often placed in Europe) or the arrangement of large credits more feasible there than anywhere else in the world. But part of the tendency toward a net outflow from the United States is attributable to the considerable impediments against capital exports that still exist in most European countries. While there has been a tendency to reduce these restrictions or to relax their application, e.g., by permitting the flotation of certain foreign loans in European capital markets, the increasing supply of capital in Europe has by no means been fully reflected in international capital movements. A number of countries with strong payments positions have reduced their rate of reserve accumulation by repaying intergovernmental debts before maturity and by increasing aid to the less developed countries; some of them could further assist the attainment of international balance by taking positive steps, including measures for a better organization of their capital markets, which could lead toward an increased net outflow of capital on private account as well.

One of the outstanding features of the past year in matters of finance has been the movement toward greater international monetary cooperation. The steps taken in this direction reflect increasing awareness by national monetary authorities of the new problems created by widespread convertibility of currencies and the growing international volatility of capital. This new situation was brought home sharply by a number of unsettling occurrences in late 1960 and the first half of 1961. In October 1960, pressure developed on the dollar. Nervousness on the part of the public at that time caused an increase in private demand for gold, which pushed the price of gold in London and other markets well above the official price of $35 an ounce. This particular phase abated as, first, the price in the London market was brought back close to $35 by official sales of gold, and, second, President Kennedy early in February 1961 pledged maintenance of the gold value of the U.S. dollar and promised determined action to correct the deficit in the U.S. balance of payments.

One month later, however, the revaluations of the deutsche mark and the Netherlands guilder, though in the long run contributing to a better equilibrium in the world balance of payments position, were followed by a new wave of speculative capital movements. The direction of the flows indicated an expectation by the public that those revaluations would be followed by a further revaluation of the deutsche mark or the guilder, or by appreciations or depreciations of other currencies. A large proportion of the burden of these movements fell on sterling, a currency in which large balances were held and whose basic position at the time was known to be weak.

The disturbing occurrences during the autumn and winter of 1960–61 gave rise to a determination in the major financial centers to do what was necessary, in the short run as well as by more fundamental changes, to defend the existing world monetary structure. After its Annual Meeting in September 1960, the Fund, with these ends in view, had begun to study its policies in a number of related fields, including the currencies to be used in drawings and repurchases, the various possibilities of Fund borrowing under Article VII, and the availability of the Fund’s resources for use in connection with capital transactions. The Fund’s Board of Executive Directors first discussed these questions in February 1961. In March 1961, the Governors of the main European central banks issued a joint statement that all rumors of further changes in currency values were unfounded. At the same time, a number of European central banks granted short-term credits for the support of sterling, to a total amount of more than $900 million. These credits gave the U.K. Government time to work out a comprehensive program, announced in Parliament in July, to counteract the pressures on sterling. The United Kingdom then received substantial assistance from the International Monetary Fund; nine different currencies equivalent in all to $1,500 million were drawn, and a stand-by arrangement for a further $500 million was concluded. The announcement of these measures in the United Kingdom, together with the massive Fund assistance, led almost immediately to a reversal of the trend on the exchange markets, especially as there was a pent-up demand for sterling held back during the period of uncertainty.

Shortly before the U.K. transaction, the ability of the Fund to counter disturbing movements of funds had been strengthened by the decision of the Executive Board making clear that the Fund’s resources could be used to offset the effects of capital movements in accordance with the relevant provisions of the Articles of Agreement, and thus eliminating any doubt that might have persisted on that score.

The arrangements negotiated during the year to replenish in case of need the Fund’s resources by borrowing under Article VII of the Agreement are described fully in Chapter 2. They constituted a further collaborative measure for the defense of the monetary system. Proposals for multilateral credit arrangements between the Fund and the main industrial countries had begun to be discussed early in 1961. In the light of developments during the year, the arrangements concluded by the year end were focused more specifically on the objective of forestalling or coping with an impairment of the international monetary system.

The borrowing arrangement is one manifestation of a growing tendency toward international solidarity in the monetary field, but there are many other signs of such a tendency. U.S. representatives now attend regularly the meetings of the Bank for International Settlements in Basle. Discussion of current financial and monetary matters has become an important part of the work of the Organization for Economic Cooperation and Development in Paris. A number of the leading central banks are evolving a policy aimed at the prevention of disturbing price movements in the London gold market. Beyond this, the entry of the U.S. authorities into the spot and forward markets for foreign exchange has been carried out in close cooperation with monetary authorities in other countries; such cooperation is essential if official exchange operations are to play a constructive role.

These manifold new developments can be expected to lead to a strengthening of the world monetary system; they also hold out hope for a closer coordination of economic and financial policies among the industrial countries, to benefit the entire community of nations.