I: The Current Perspective in International Finance

International Monetary Fund
Published Date:
September 1956
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Last year’s Annual Report stated that the prospects at that time were favorable for further continued improvement in the international payments situation. Events during the year covered in this Report have on the whole confirmed that expectation. The world payments situation has in fact improved, restrictions have been further relaxed, the transferability of important currencies has been extended, and discrimination, especially that resulting from bilateral arrangements, has had less influence on the direction of trade. Progress in extending multilateral trade and payments has thus been maintained, although during the year there was no addition to the list of Fund members which have established formal convertibility of their currencies.

The basis for the favorable developments of recent years has been the recovery of production from the dislocation caused by World War II. The intensive postwar investment programs have brought good returns. Nearly everywhere there have been large increases in industrial production; some countries whose industrial producers had formerly been at a disadvantage in export markets have shown increased competitive strength; and the movement toward the diversification of the less developed economies has made further progress. Agricultural production also has expanded, though in some countries, where food production has scarcely kept pace with the increase of population, further improvements are desirable. The policy of protecting or expanding agricultural production in many of the more highly developed countries has, however, created marketing difficulties for efficient producers elsewhere, and for many agricultural products the problem in 1955–56 was one of surpluses rather than of shortages.

On the other hand, inflationary pressures are still strong in a number of countries; in some they have been kept under effective control, in others they have not. Continuous care is necessary everywhere to curb the influences by which inflationary pressures are easily generated in the modern world. Their strength is increased if public expenditure is not covered by receipts from noninflationary sources, and in many countries special problems are presented by pressure for wage increases which are not matched by corresponding increases in productivity. However, in recent years there has been much more general understanding of the importance of monetary stability. There can be no certainty that instability may not recur in the major economies, but the responsible authorities are in general sensitive to these risks. There is a greater readiness to take corrective or preventive measures, and the value of flexible monetary and fiscal policies as a major means of achieving and maintaining stability is increasingly recognized. The authorities everywhere also regard the maintenance of satisfactory levels of productive employment as a major objective of economic policy. Deflation and the unemployment which comes with it have to be avoided with as much care as the distortions and injustices of inflation.

It is always a matter of some difficulty at any point of time to determine with confidence whether current changes in business conditions are superficial and transitory, and therefore do not call for action, or whether they indicate that the prompt application of either stimulant or restraint is desirable. It may be equally difficult in any given situation to determine how far it is desirable to combine fiscal measures with monetary measures, or to what sectors of the economy adjustments in policy should be applied. The differences of opinion which are inevitable about these questions are, however, quite consistent with a general acceptance of the value of flexible monetary policies. Conditions during the last year or two have made it possible to maintain cautious credit policies without unduly hampering the expansion of production or creating any serious problems of unemployment. So far, it has not been necessary to test the effectiveness of economic policy for maintaining stability when strong depressive forces are at work. However, the experience of recent years suggests a cautious optimism about the possibility of keeping within reasonable limits the influences that produce severe depression, and hence of keeping in check the fluctuations in world economic activity that are to be expected. Fears of depression in the United States, which the experience of the interwar period suggested would have disruptive effects upon the economy of the rest of the world, have not been borne out during the postwar years; and the degree of stability achieved in the U. S. economy has made it easier to gain widespread support for freer and more fully multilateral payments arrangements.

There are, however, certain factors which also need to be borne in mind in any assessment of the future development of this generally encouraging world payments situation.

The first of these is the important part played in the international balance of payments in recent years by the expenditures abroad of the U. S. Government. These expenditures have made it possible for many other countries at the same time to increase their dollar purchases, and to strengthen their international reserve positions. About one quarter of the supply of U. S. dollars available to the rest of the world since 1950 has been provided by the U. S. Government. In 1955, the total of U. S. Government net expenditures abroad was about $4.8 billion, including $2.8 billion for military expenditure and more than $1.8 billion for nonmilitary grant aid, an amount which considerably exceeded the $1.1 billion in gold and dollars which in that year were added to official reserves outside the United States as a result of transactions with the United States. U. S. Government expenditures abroad have been much more stable in recent years than either the flow of international private capital or the export earnings of some raw material exporters. But, while drastic changes in the U. S. aid program may be unlikely in the near future, allocations to individual countries will no doubt vary widely, and governments may hesitate to base important decisions on the assumption that receipts from U. S. aid will not decrease.

Another factor is that countries whose export trade consists predominantly of primary products are especially subject to variations in export earnings. As shown in detail later in this Report, some of them have derived only limited benefits from the general expansion of trade and the strengthening of balances of payments during recent years. In fact, most of the countries which during the past year had serious payments problems are to be found in this group. For these countries, the case for building up reserves in times of high prices and strong export markets, substantial enough to withstand normal balance of payments fluctuations, has to be weighed against the case for speeding up economic development by using a larger proportion of foreign earnings for that purpose.

A third factor is the problem, with which many countries are faced, of disposing of surpluses of agricultural products, partly as the result of policies widely adopted for the support of farm prices and incomes. The policy of the United States in this connection is a matter of particular concern to other countries which fear that the efforts made since 1954 to expand outlets abroad for the large surpluses that have accumulated in the United States may jeopardize their own export markets or depress prices, and thus create difficulties in their external payments. Actual shipments under the U. S. surplus disposal program in the fiscal year ended June 1954 amounted to $160 million, and in the following year to $680 million. In the fiscal year ending June 1956, they may reach $1,450 million. More than 60 per cent of these exports has been sold for domestic currencies, a major part of which has been lent by the United States to the importing governments for developmental projects. Sales of U. S. agricultural surpluses may to some extent take the place of ordinary U. S. agricultural exports, and the general policy of the U. S. authorities is to consult with other interested exporting countries in connection with the sales of surpluses. In estimating their prospects for the near future, however, and especially where market conditions are already uncertain, some agricultural exporting countries consider that they have to take account of the possibility that U. S. exports of agricultural surpluses may be pushed more energetically.

The improvement in the world payments situation which continued in 1955 has been shown in the continued growth in the value of world trade. The surplus in the over-all payments balance of the rest of the world with the United States was somewhat less in 1955 than it had been in 1954, but was large enough to lead to a further substantial increase in the gold and dollar reserves of countries outside the United States. In addition to the large-scale assistance provided after the war by several countries, and in particular by the United States, the most important reason for the continued improvement in recent years has been the sustained high level of economic activity in most countries, and particularly in the industrial countries. Most of the abnormal postwar difficulties arising from the urgent need to carry out massive reconstruction of both industry and agriculture have faded into the past, and with them have gone the acute payments problems which gave rise to the need for severe exchange and trade restrictions. These developments have permitted considerable increases in the dollar imports of some countries, which were in part facilitated by earlier relaxations of discriminatory restrictions on these imports. The movement toward more liberal multilateral trading arrangements carries with it the benefits to be gained by buying imports on a strictly competitive basis, unaffected by currency considerations. It also tests the ability of the economies concerned to make the adjustments required if their positions as sellers in competitive markets are to be maintained and strengthened. The adjustments required by the liberalizing movements of recent years have presented no serious difficulties. This experience appears to justify the expectation that the further adjustments required as these movements are carried forward may be faced with some confidence that they will be successful.

By and large, the members of the Fund have responded to this improved situation by progressive relaxation of exchange and trade restrictions. Substantial progress has been possible even in countries which have felt themselves handicapped by obstacles to freer entry of their exports to the markets of important industrial countries. These obstacles still have considerable significance, and the industrial countries should continue efforts to reduce them as extensively as feasible. In view of the predominant position of the United States as a producer and trader, special importance attaches to its commercial policy. In this connection it is encouraging to note the continued strong support given by the President of the United States to various elements of liberal trade policy, including membership in the Organization for Trade Cooperation. The agreements for tariff reduction and tariff stabilization made in May 1956 by the Contracting Parties to the General Agreement on Tariffs and Trade (GATT) show that there is still scope for effective negotiation for reducing the barriers to international trade.

In 1955, there was a somewhat greater supply of dollars and other convertible currencies available for use in international trade, and a stronger tendency to settle payments deficits in gold or convertible currencies. The higher ratio of 75 per cent gold to 25 per cent credit established for European Payments Union (EPU) settlements since August 1955 is an illustration of the general trend, as is also the increase in purchases and sales of transferable sterling against dollars by certain countries in order to influence their net EPU positions or for other purposes. The justification for maintaining severe discriminatory restrictions against dollar imports thus tended to weaken. The use of transferable currencies in international payments was also extended somewhat during the year. The importance of the transferable sterling market, in which official intervention had been authorized by the U.K. authorities in February 1955, has grown; both the transferable sterling and the security sterling rates have improved, with the discount on transferable sterling against the official spot rate at about 1 per cent. The partly convertible deutsche mark (Beko Mark) has been used to finance an increasing volume of trade as it became freely transferable between nearly all non-dollar countries.

The convertibility of sterling has been widely regarded as a crucial element in any further formal move toward convertibility for other currencies. When sterling area reserves declined in the second half of 1955, it became clear that there would be no early action by the U.K. authorities to extend general authorization to all nonresidents to convert their current sterling earnings into convertible currencies at the official rate of exchange. Though the sterling area reserve position has since improved, the earlier declines have not yet been made fully good. Certain Western European countries whose reserve positions have steadily strengthened have been reluctant to make any independent formal commitment for convertibility on their own account without reference to sterling. It may be expected that, in the year ahead, if satisfactory balance of payments positions are maintained, these countries will continue the introduction and further extension of most of the essential features of convertibility, even though they may not make their currencies formally convertible.

It is in this world payments situation that the Fund will continue to encourage the forward movement to a fully multilateral system, and to urge its members, with appropriate consideration of the circumstances of particular cases, to diminish their use of restrictive and discriminatory practices, wherever their balance of payments positions and prospects warrant such action. Moreover, the Fund is always ready to make its resources available to members who may need its help in establishing or maintaining the convertibility of their currencies or in overcoming temporary balance of payments difficulties.

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