Chapter

IV Domestic Financial and Economic Developments

Author(s):
International Monetary Fund
Published Date:
September 1958
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The Industrialized Countries

IN MOST of the industrialized countries the monetary authorities faced, during the period under review, the difficult task of determining the most appropriate time when a policy of credit restraint should be reversed in response to changing economic conditions. Their task was, as usual, made difficult by conflicting evidence about the direction in which the economy was moving as well as by the fact that the full effects of monetary measures usually cannot be felt until some months after the measures have been taken.

The authorities in most of these countries succeeded, by means of monetary and fiscal measures, in preventing inflation from getting out of control, and, with a few exceptions, such as France, these countries avoided major inflationary movements. In most of them, restrictive internal policies helped to limit the rise in prices; in Japan, price increases were also restrained, in part, by balance of payments deficits. With the uncertainties still prevailing in the first months of 1958, it was too early to determine how far the measures then being taken would be effective in checking or reversing any downward trends that were apparent.

In both the period of increasing economic activity and the early months of the recession in those countries where recession had begun, monetary measures were, as a rule, used more extensively than fiscal measures in order to make the necessary adjustments in the economy. To the extent that taxation receipts are affected by economic conditions, the budget has an automatic influence in partly offsetting inflationary or deflationary conditions, without any deliberate action by the government. In times of boom, however, it is often difficult to raise taxes swiftly and in amounts sufficient to produce a budget surplus of the size required completely to offset expansionary tendencies. In the event of a downturn, the authorities, often uncertain whether it is merely temporary or requires more far-reaching remedial measures, may be reluctant to reduce taxes because, if conditions change suddenly, it will not be so easy to raise them again as it was to lower them. Monetary measures, on the other hand, can be reversed more easily than fiscal measures. In many countries, too, there are practical difficulties that make it impossible quickly to expand or to contract the size of the public sector of the economy.

Developments and Policies to Restrain Investment

Industrial production, employment, and national income in real terms continued to expand in nearly all countries during the first half of 1957, though at a slower pace than in 1956 (Table 11). Prices and wages also continued to rise.

With the demand for investment funds tending to increase further and savings lagging behind, interest rates in the financial centers of many industrial countries continued to rise during the first half of 1957 (Table 12). The increases in interest rates were due in part to the influence of restrictive credit policies, including the raising of the discount rate in a number of countries. As in 1956, most economies, when faced with restrictive credit policies and rising interest rates, economized in the use of money, and both the turnover of deposit money and the income velocity of money supply continued to rise (Table 13).

Table 11.Prices, Production, and Employment in Selected Countries, 1956, 1957, and 1958(Average percentage changes from corresponding period of previous year)
Cost of LivingIndustrial ProductionEmployment, Excluding Agriculture
195619571957,

2nd

half
1958,

1st

quarter
195619571957,

2nd

half
1958,

1st

quarter
195619571957,

2nd

half
1958,

1st

quarter
Australia155221112
Austria344146663332
Belgium-Luxembourg33326–3–612
Canada14337–3–5543
Denmark544213533–23–44344
France2361512910121332
Germany, Federal Republic of32248654632
Italy41228872241414
Japan1341243183113238866
Netherlands268742–424144
Norway4322432–422
Sweden5445342114414–14, 5
Switzerland112225542
United Kingdom6343–12211
United States23343–2–10321–3
Sources: Based on data from International Monetary Fund, International Financial Statistics, and United Nations, Montlhy Bulletin of Statistics

No index of industrial production is compiled in Australia or Switzerland.

January only.

Manufacturing production.

Employment in manufacturing.

Average of January and February only.

Sources: Based on data from International Monetary Fund, International Financial Statistics, and United Nations, Montlhy Bulletin of Statistics

No index of industrial production is compiled in Australia or Switzerland.

January only.

Manufacturing production.

Employment in manufacturing.

Average of January and February only.

Table 12.Market Interest Rates, Selected Countries, 1956, 1957, and 1958(In per cent per annum)
December

1956
June

1957
December

1957
March

1958
United States
Treasury bill rate3.233.323.101.35
Government bond yield (medium-term)3.693.742.952.40
Government bond yield (long-term)3.433.613.223.25
Canada
Treasury bill rate3.673.813.622.27
Government bond yield4.014.373.753.71
United Kingdom
Treasury bill rate4.933.876.435.77
Government bond yield (short-term)5.104.835.915.06
Government bond yield (long-term)4.904.945.415.13
Corporate bond yield (debentures)5.856.006.476.26
Australia
Government bond yield (short-term)4.694.624.414.30
Government bond yield (long-term)5.095.045.004.98
New Zealand
Government bond yield4.784.734.985.01
Union of South Africa
Treasury bill (tap) rate3.253.253.253.50
National Finance Corporation (deposit) rate3.123.123.123.38
Government bond yield4.754.754.755.00
Belgium
Government bond yield4.424.604.944.80
Denmark
Government bond yield5.795.765.745.43
France
Government bond yield5.626.055.916.11
Call money rate, public3.1712.853.343.52
Call money rate, private3.9215.785.725.96
Germany, Federal Republic of
Call money rate4.944.693.843.63
Mortgage bond yield5.55.65.14.7
Italy
Government bond yield7.216.786.846.45
Netherlands
Treasury bill rate3.483.604.643.14
Government bond yield4.214.384.864.40
Sweden
Government bond yield4.054.204.464.42
Industrial bond yield4.944.955.285.28
Commercial banks’ discount rate (three-month bills)4.504.505.755.75
Sources: International Monetary Fund, International Financial Statistics; Central Statistical Office, Monthly Digest of Statistics (London); Institut National de la Statistique et des Etudes Economiques, Bulletin Mensuel de Statistique (Paris); Skandinaviska Banken, Quarterly Review (Stockholm); and Konjunkturinstitutet, Konjunkturjournalen (Stockholm).

January 1957.

Sources: International Monetary Fund, International Financial Statistics; Central Statistical Office, Monthly Digest of Statistics (London); Institut National de la Statistique et des Etudes Economiques, Bulletin Mensuel de Statistique (Paris); Skandinaviska Banken, Quarterly Review (Stockholm); and Konjunkturinstitutet, Konjunkturjournalen (Stockholm).

January 1957.

Table 13.Indices of Turnover of Deposits and of Income Velocity of Money, Selected Countries, 1956 and 19571(1955 = 100)
Turnover of DepositsIncome Velocity
1956195719561957
Australia10811710721142
Austria115125111115
Canada1263140311231183
Denmark100104104106
France10513149698
Germany, Federal Republic of10310310197
Italy935915
Netherlands1296155610551155
Norway1053111311031183
Sweden111311731043
Union of South Africa117312131092, 31132, 3
United Kingdom108114
United States107114105109
Sources: Based on data from International Monetary Fund, International Financial Statistics; United Nations, Monthly Bulletin of Statistics; Commonwealth of Australia, National Income and Expenditure 1956–57; Monatsberichte des Österreichischen Instituts fur Wirtschaftsforschung (Vienna); Dominion Bureau of Statistics, Canadian Statistical Review (Ottawa); Borsen (Copenhagen); Conseil National du Crédit, Compte Rendu de l’Evaluation des Moyens Monétaires et Financières, 1957 (Paris); Banco di Roma, Review of Economic Conditions in Italy; Centraal Planbureau, Centraal Economisch Plan, 1958 (The Hague); Statistisk Sentralbyrå, Statistiske Meldinger (Oslo); South African Reserve Bank, Quarterly Bulletin of Statistics; and Economic Survey 1958 (Cmnd. 394, London).

Turnover of deposits is the ratio of the monthly average of bank debits or bank clearings to deposit money (average of end-of-month data). Income velocity is the ratio of gross national product to money supply (average of end-of-month data).

Year ended June 30.

Average of end-of-quarter data used for deposit money and money supply.

Based on data for 11 months.

Average end-of-quarter data used for money supply.

Money supply minus monetary liabilities in notes used for deposit money; end-of-quarter data.

Sources: Based on data from International Monetary Fund, International Financial Statistics; United Nations, Monthly Bulletin of Statistics; Commonwealth of Australia, National Income and Expenditure 1956–57; Monatsberichte des Österreichischen Instituts fur Wirtschaftsforschung (Vienna); Dominion Bureau of Statistics, Canadian Statistical Review (Ottawa); Borsen (Copenhagen); Conseil National du Crédit, Compte Rendu de l’Evaluation des Moyens Monétaires et Financières, 1957 (Paris); Banco di Roma, Review of Economic Conditions in Italy; Centraal Planbureau, Centraal Economisch Plan, 1958 (The Hague); Statistisk Sentralbyrå, Statistiske Meldinger (Oslo); South African Reserve Bank, Quarterly Bulletin of Statistics; and Economic Survey 1958 (Cmnd. 394, London).

Turnover of deposits is the ratio of the monthly average of bank debits or bank clearings to deposit money (average of end-of-month data). Income velocity is the ratio of gross national product to money supply (average of end-of-month data).

Year ended June 30.

Average of end-of-quarter data used for deposit money and money supply.

Based on data for 11 months.

Average end-of-quarter data used for money supply.

Money supply minus monetary liabilities in notes used for deposit money; end-of-quarter data.

Raising of the discount rate. Among the various instruments of credit restraint, wide use was made of variations in the discount rate. Six countries (Belgium, Ireland, Sweden, Switzerland, the United Kingdom, and the United States) raised the rate once in 1957, and three countries (France, Japan, and the Netherlands) raised it twice. Some of the increases made in the second half of 1957 were in countries, such as France and the United Kingdom, where financial pressures continued. In Canada, where the rate is fixed every week at a margin of ¼ per cent above the latest weekly average tender rate for 91-day treasury bills, it rose in keeping with tight money conditions during the first eight months of the year; in late August 1957 it began to decline, and the decline continued in early 1958.

Increases in the discount rate were intended in most countries to restrict the use of credit by both the private and the public sectors, and also to stimulate the flow of savings in response to higher interest rates. In some countries it was also an important objective to influence the international flow of funds, partly by raising the cost of such movements, but mainly with a view to increasing confidence. In the United Kingdom, for example, the increase was also to counter the capital outflows associated with the exchange crisis of mid-1957. In Belgium and Ireland, it was used mainly to prevent a further outward flow of funds in response to higher interest rates in other financial centers. In the Union of South Africa, where there was no increase in the official discount rate, other interest rates were allowed to rise early in 1958 for the same reasons. At the time of the alteration of the franc exchange rate, Dutch and French interest rates were further increased to discourage speculation.

Money market rates continued to rise in all countries where the discount rate was raised, and in a number of other countries as well (Table 12). In France, Japan, the Netherlands, the United Kingdom, and some other countries, the rate of bank credit expansion to the private sector was less in 1957 than in 1956. On the other hand, government net borrowing from the banking system was less than in 1956 in only a few countries. In many countries, and especially in Austria, Denmark, West Germany, the Netherlands, and Sweden, private savings, as indicated by increases in time and savings deposits, increased more rapidly than in 1956.

The Federal Republic of Germany was the first country to reverse the upward movement of the discount rate, reducing it from 5.5 per cent to 5 per cent in September 1956, and then in four successive stages to 3 per cent in June 1958. During the boom, Germany, unlike other countries, had no balance of payments difficulties, inasmuch as part of the boom resulted from export demand, and also because the authorities pursued conservative monetary and fiscal policies. As soon as the tensions of the boom began to subside the discount rate was lowered, with the desire to narrow the gap between interest rates in Germany and abroad and thus to curb the inflow of funds from abroad.

Other restraints on credit. Other steps, in addition to raising the discount rate, were taken in many countries to limit credit expansion. In some countries, reserve requirements for commercial banks were either raised or the method of computing reserves was changed so that these requirements would have a more restrictive effect. Thus in Belgium, beginning in November 1957, the system whereby a part of the reserves required for any increase in bank deposits was automatically channeled to the Government was changed. This part is now channeled to a special institution (Fonds des Rentes) for uses contributing to monetary stability. In Japan, advance deposit requirements for imports were sharply increased, and restrictions were placed on sterling usance bill facilities for imports. In Germany, there were large increases in reserve requirements for foreign-owned deposits.

Other monetary measures included selective credit controls—particularly regulation of the terms and conditions of credit for installment buying—moral suasion, and open market operations. In September 1957, the clearing banks in the United Kingdom were requested to restrict advances during the next 12 months so that they would not rise above the level of the previous 12 months. Advances to exporters in connection with medium-term export credits were excluded. The authorities in the Netherlands requested the banks in September 1957 to reduce credit to local authorities to the average levels of 1955 and 1956. In Norway, the gentlemen’s agreement on loans and advances which had been made by the authorities and the commercial banks was extended for another year in January 1958, although in the previous year the banks had not limited credit expansion as rigidly as was required by the agreement. In France, lower ceilings were placed on rediscounts for individual banks in mid-1957 and again in December, and ceilings were placed in February 1958 on the amount of short-term and medium-term bank credit which might be extended to the private sector.

Open market operations have become one of the most important instruments of credit policy in Germany, where they have been used to offset in part the expansionary impact of the inflow of funds from abroad. In the United Kingdom, the authorities engaged in funding operations in order to lengthen the average term of the debt held by the public and to reduce the liquidity of the commercial banks.

Fiscal measures. Although the main emphasis was usually placed on monetary measures, these were also supported in some countries by fiscal policy. In the Netherlands, both monetary and fiscal policy were used to restrain the boom, and this coordination was partly responsible for the success attained there in containing inflation and maintaining both internal and external stability. In addition to increasing the bank rate in September 1957, the Government of the United Kingdom took steps to stop the upward trend of public investment. In France, taxes were raised on two occasions in 1957 and some subsidies were reduced, but the budget continued to be an inflationary factor.

In some countries, such as Belgium, France, Finland, Ireland, and the Netherlands, the policy of using subsidies to limit increases in prices and wages was reversed by reducing or eliminating the subsidies, and sometimes even by increasing indirect taxes, such as the turnover tax. In Belgium, the turnover tax on a number of consumer goods was restored in the last quarter of 1957.

Developments and Policies in Recession

Around the middle of 1957 recessionary tendencies became increasingly evident in some industrial countries; but in many of them expansion still continued in early 1958. The cost of living and wages, however, had not declined by the first quarter of 1958 and in most countries both continued to rise. In some countries, for example, the United States and the Netherlands, the decline in demand was mainly of domestic origin. In others, including Belgium, Canada, Norway, and Japan, the influence of the foreign sector was important.

In countries where economic activity had fallen off, the reduced demand for investment funds toward the end of 1957 and in early 1958 and the maintenance of private savings at or near the high levels of the boom were important influences in reducing interest rates in many financial centers (Table 12). The lower interest rates resulted in part from a relaxation of credit controls, which in some countries included reductions of the discount rate.

With recession and the easing of money conditions, there were some indications that the private sector was beginning to increase its cash balances relative to transactions. In the United States, the income velocity of money (seasonally adjusted) fell in the last quarter of 1957 for the first time in three years.

The upward movement of wages in 1957 was greatest where production was still expanding. In countries where signs of a recession began to appear, wages also continued to rise, but there was some weakening of the bargaining position of labor. Evidence of this weakening can be seen both in the course of wage negotiations in the United States in the early months of 1958 and in wage developments in such countries as the Netherlands, Norway, and Austria. In the Netherlands, toward the end of 1957, the trade unions refrained from demanding any general wage increase and limited their claims to fringe benefits. In Norway, in early 1958, a new three-year agreement between the Employers’ Federation and the National Federation of Trade Unions led to only very small wage increases in 1958. In Austria, wage increases during 1957 as a whole were limited, and labor productivity increased more than wages.

Countries that had not begun to feel the recession continued their restrictive monetary policies in early 1958. Other countries where economic activity had fallen off sought to revive demand by encouraging bank credit expansion. Most countries used only one or two instruments of monetary control; but in the United States, the authorities lowered the discount rate, engaged in open market operations, and reduced reserve requirements.

The main instrument of monetary policy in many countries during the recession has been a lowering of the discount rate. A change in one country tended to be followed by changes in others, which helped to maintain the more or less normal relations between interest rates in different financial centers. In the United States, the Federal Reserve Banks reduced their discount rates in four steps from 3½ per cent in November 1957 to 1¾ per cent in April 1958; there were also some open market purchases and in February, March, and April 1958 the reserve requirements against demand deposits of member banks, which had been 20 per cent for central reserve city banks, 18 per cent for reserve city banks, and 12 per cent for country banks, were reduced in four stages to 18 per cent, 16½ per cent, and 11 per cent, respectively. The reductions of the German discount rate in January and June 1958, while prompted mainly by the desire to establish normal relations between German interest rates and interest rates in other countries, were also intended to improve the general conditions for financing domestic investment. By the middle of 1958 the discount rate had also been reduced in Belgium, Denmark, Ireland, Italy, the Netherlands, Sweden, and the United Kingdom.

The U.K. bank rate was reduced by three stages, from 7 per cent in March 1958 to 5 per cent in June. These reductions followed the improvement in the external position of sterling, and it was announced that they were not to be interpreted as indicating a reversal in the general direction of monetary policy. However, some measures were also taken in early July which modified the existing control of bank credit and of borrowing generally. In the Netherlands, too, although the reduction of the discount rate from 5 per cent to 4½ per cent in January 1958 and to 4 per cent in March indicated a change in monetary policy, the Netherlands Bank informed the commercial banks that this should not be interpreted as a signal to increase their loans. In fact, before the first reduction, the Netherlands Bank requested the banks to avoid excessive credit expansion to the private sector in the first half of 1958. If credit was expanded more than 4 per cent above the level of the second quarter of 1957, a rate at least 1 per cent above the official rate was to be charged for the use of Netherlands Bank facilities. This directive was amended in early March to permit somewhat larger bank advances in special circumstances, and at the end of April these limitations were revoked. The Netherlands Bank also increased the reserve requiremerits of the commercial banks, first from 4 per cent to 5 per cent, and then to 6 per cent. Because of the structure of the money market in the Netherlands, however, these increases were more closely related to the technical effects of increasing foreign exchange reserves than to any considerations relating to the domestic credit situation.

In Canada, the slowing down of economic activity and the falling off in demand for funds caused market interest rates to decline in the last few months of 1957. With lower rates on treasury bills, the Bank of Canada lowered its bank rate continuously from 4.33 per cent in August 1957 to 1.62 per cent at the end of April 1958.

In Australia, credit controls were somewhat easier during 1957. After April 1957, there was no increase in the reserve requirements imposed upon the trading banks by the obligation to hold “Special Accounts” with the Commonwealth Bank; and in December 1957, the Commonwealth Bank suggested to the commercial banks that some increase in advances would be appropriate, in view of the need to meet the reasonable requirements of customers arising from adverse seasonal conditions. In February 1958, the Commonwealth Bank released £A 15 million and in April £A 20 million from the commercial banks’ Special Account balances.

Fiscal measures were under active consideration by the authorities in the United States and in other countries at the beginning of 1958, and some fiscal measures were adopted in Canada, the Netherlands, and Austria. In Canada, there were reductions in excise taxes on motorcars and in personal and corporate income tax in certain income brackets. In order to deal with unemployment more effectively, the Netherlands Government reactivated certain public expenditures in February 1958, especially for public works and housing, which had been postponed at the time of the boom.

In the United States, “built-in stabilizers,” such as unemployment compensation benefits, helped to sustain personal income despite declines in output and employment. Moreover, the maintenance of government expenditures as receipts declined, which would result in a large budget deficit in 1958-59, was expected to act as a stabilizing factor.

In many countries, the government sector tends to act as an offsetting factor to any recession. It is not difficult for governments to have budget deficits. But while a deficit may maintain domestic expenditures and employment, it also tends to increase imports, or to keep them at an excessively high level. Even where, because of ample monetary reserves, balance of payments considerations have not been of decisive importance, many governments have hesitated to increase by deliberate tax reductions any deficits that have emerged from an automatic decline in taxation receipts. Moreover, there has been no resort to massive increases in public expenditure as part of an antirecession program. Especially when the cost of living has continued to rise, as has been the case in some countries in the current recession, it has been felt particularly undesirable to adopt measures that might revive latent inflationary forces. In attempting to sustain demand, the authorities always have a delicate problem in choosing such measures as are least likely to provoke any increase in costs and prices, to impair the willingness to save, or to make it more difficult to reintroduce a policy of restraint should business again show a marked upward trend. In countries which are not in a strong reserve position, the problem of coping with the difficulties of a recession is, of course, eased to the extent that they are able, during periods of expansion, to accumulate sufficient reserves so that, when they feel the effects of a recession, they may avoid any intensification of trade and exchange restrictions which would distort the pattern of their own and world trade.

The Less Industrialized Countries

The less industrialized countries are still faced with the problem of promoting economic development with stability. In 1956 and 1957, a number of them, including Bolivia, Chile, Colombia, Paraguay, and Peru, instituted stabilization programs. Other countries, such as India, after completing one development plan, adopted a second plan in 1956 or 1957. Still others, such as Malaya, are formulating or adopting plans for economic development for the first time since the attainment of independence. It is in the context of the difficulties of securing adequate finance for development that the effects upon the prices of primary products of the leveling off of economic activity in the United States and other industrial countries in 1956 and of the recession beginning in the second half of 1957 have to be considered. Fluctuations in these prices, which are sometimes very violent, have for many years presented serious problems for the less developed regions of the world. Since, in 1957, the prices of their imports either did not fall or fell less than the prices of their exports, many underdeveloped countries found their terms of trade becoming more and more unfavorable. This constituted a loss in real income and added to the usual burdens and difficulties. Despite the difficult circumstances of last year, some countries achieved a fair measure of success in maintaining reasonably stable conditions. In others, radical action for the control of inflation is still delayed; even in some of the countries that have adopted stabilization programs there is still much to be done before the success of these programs can be regarded as assured.

The magnitude of the problems of adjustment which falling world prices have created for these countries may be judged not only by the size of the declines in the prices of their key export products, but also by the significance of these products for the economy as a whole, including the government sector. For example, in Bolivia, 75 per cent of the tin output is produced by government enterprises, and tin accounts for more than one half of total exports. In Chile, 70 per cent of export earnings is derived from copper, and 20 per cent of government revenue is directly dependent upon it. The efforts made by governments to adjust their economies to falling export prices constituted the most important internal financial development in many of the less industrialized countries during 1957 and early 1958. In some countries such as Brazil, however, the Government, instead of making any major attempt to adjust, adopted measures with a view to maintaining money incomes in the export sector, and the balance of payments deficit increased. In contrast to the previous postwar recessions in 1948-49 and 1953-54, however, more countries in their efforts to achieve a smooth and rapid adjustment now appear to be making greater use of monetary and fiscal measures in addition to or as a substitute for any quantitative import or other restrictions that may be imposed.

Money Supply and Price Movements

The rate of increase in money supply was smaller in 1957 than in 1956 in nearly all the 36 less industrialized countries for which data are available; in some countries, the money supply actually declined. In 1957, indeed, there were 12 countries, compared with only 5 in 1956, where the increase was less than 5 per cent, and only 6 countries had increases of more than 20 per cent in 1957, against 9 in 1956 (Table 14).

Table 14.Percentage Increase or Decrease (—) in Money Supply and Cost of Living, Selected Countries, 1956 and 1957
Countries Classified by Percentage

Increase in Money Supply, 1957
Money Supply1Cost of Living1
1956195719561957
Increase below 5 per cent
Burma20–1898
Haiti–3–91062
Ceylon5–85
Viet-Nam–7–61
Honduras11–6–1–2
Malaya0–333
Nicaragua–2–2–161
El Salvador14213
Egypt161443
Paraguay3531715
Ecuador14402
India64124
Increase of 5–10 per cent
Cuba95–2
Thailand6555
Dominican Republic6517
Pakistan96412
Uruguay136618
Mexico117–214
Philippines12751
Costa Rica18–13
Iraq139663
Guatemala2010–1
Increase of 11–20 per cent
Israel231155
Argentina17131626
Colombia2414723
Syria2314–4
Korea371646–8
Lebanon917738
Peru1817568
Iran1717114
Increase above 20 per cent
China (Taiwan)2421132
Chile38253817
Bolivia263278473–14
Venezuela143211
Brazil22342814
Indonesia941–255
Sources: Based on data from International Monetary Fund, International Financial Statistics, and United Nations, Monthly Bulletin of Statistics.

Changes are from end of one year to end of next year.

Change from March 1956 to March 1957.

Change from September 1956 to September 1957.

This figure is in part a result of the withdrawal of Egyptian currency from circulation in the Sudan to an amount equal to approximately 6 per cent of money supply at the beginning of 1957.

Change from June 1956 to June 1957.

Change from September 1956 to September 1957.

Change from November 1956 to November 1957.

Change from December 1956 to November 1957.

Sources: Based on data from International Monetary Fund, International Financial Statistics, and United Nations, Monthly Bulletin of Statistics.

Changes are from end of one year to end of next year.

Change from March 1956 to March 1957.

Change from September 1956 to September 1957.

This figure is in part a result of the withdrawal of Egyptian currency from circulation in the Sudan to an amount equal to approximately 6 per cent of money supply at the beginning of 1957.

Change from June 1956 to June 1957.

Change from September 1956 to September 1957.

Change from November 1956 to November 1957.

Change from December 1956 to November 1957.

Although in many countries a smaller increase in the money supply in 1957 signified a lessening of domestic inflationary pressures, in some of them, for example, Burma, Ceylon, Iraq, the Philippine Republic, and Uruguay, it was mainly a result of a decline in foreign exchange reserves (Table 15). In the majority of countries, however, a rate of bank credit expansion to both the private and the public sectors, which was much larger than the rate of increase in output, continued to have inflationary consequences. In most of the countries where the money supply increased by more than 10 per cent, bank credit expansion to the private sector was more important than bank credit to the government as a factor of instability (Table 15).

Table 15.Factors Affecting Changes in Money Supply in the Less Industrialized Countries in 1957
Countries Classified by

Percentage Increase in

Money Supply, 1957
Total

Percentage

Increase in

Money

Supply
Increase in

Government

Net

Borrowing

from the

Banking

System1
Bank

Credit

Expansion

to the

Private

Sector
Increase in

Foreign

Assets2
Others3
As percentage of money supply at beginning of year
(1)(2)(3)(4)(5)
Increase below 5 per cent
Burma–17.6–5.26.9–15.3–4.0
Haiti–9.10.2–0.2–18.99.7
Ceylon–7.711.74.9–17.6–6.7
Viet-Nam–7.2–18.17.45.4–1.9
Honduras–6.2–0.210.1–8.0–8.1
Malaya–3.03.0–7.9
Nicaragua–1.9–2.2–8.0–13.4–5.1
El Salvador–3.914.62.3–13.1
Egypt1.049.66.2–11.4–3.4
Paraguay3.3–7.13.21.65.6
Ecuador4.0–4.018.88.2–18.9
India4.423.06.0–10.7–13.8
Increase of 5–10 per cent
Cuba5.09.27.8–4.9–7.1
Thailand 55.1–1.011.14.8–10.0
Dominican Republic5.423.49.45.6–33.1
Uruguay6.10.435.7–20.1–9.9
Pakistan6.48.21.0–7.95.3
Mexico6.66.76.6–2.7–4.0
Philippines6.720.0
16.4–16.5–13.2
Costa Rica8.313.40.7–5.7
Iraq69.012.79.0–28.115.3
Guatemala10.3–3.016.13.1–5.7
Increase of 11–20 per cent
Israel11.53.016.80.7–9.0
Argentina12.78.019.40.1–14.9
Colombia13.513.219.5–24.15.0
Syria14.413.57.7–3.1–3.7
Korea16.422.527.05.9–39.1
Peru 517.46.821.72.7–13.8
Iran717.45.813.413.3–15.0
Increase above 20 per cent
China (Taiwan)20.812.225.93.7–21.1
Chile25.39.936.2–7.0–13.8
Bolivia827.01.713.137.0–24.8
Venezuela32.4–33.338.053.7–26.0
Brazil33.919.423.3–2.8–6.1
Indonesia41.242.9–2.7–3.14.1
Source: Based on data from International Monetary Fund, International Financial Statistics.

The monetary system’s claims on government less government deposits is used to represent net borrowing of the central government from the banking system. The increase in net borrowing is compared with money supply at the beginning of the year. In Argentina, Brazil, Chile, China (Taiwan), Dominican Republic, Ecuador, Haiti, Iran, Korea, Nicaragua, Pakistan, the Philippines, Syria, and Uruguay, it includes transactions of official entities. In Ecuador, transactions of local government authorities are also included.

Changes in foreign assets for most countries are gross, except for Brazil, Colombia, Egypt, Haiti, Korea, the Philippines, Syria, Thailand, Uruguay, and Venezuela.

This is the sum of the remaining items as given in the Monetary Survey in International Financial Statistics, and therefore the total of columns 2 to 5 in the table is equal to the percentage increase in money supply. The remaining items are usually unclassified assets less quasi-money and unclassified liabilities consisting mainly of capital. Counterpart funds are also included in Burma, Chile, China (Taiwan), Indonesia, Korea, and Viet-Nam; deposits of the UN in Korea; import deposits in Chile and Colombia; and prepayments for exchange in Indonesia, Nicaragua, and Paraguay.

This figure is in part a result of the withdrawal of Egyptian currency from circulation in the Sudan to an amount equal to approximately 6 per cent of money supply at the beginning of 1957.

Year ended June 1957.

Year ended September 1957.

Foreign assets were revalued in May 1957. In order to make the December 1957 figures comparable with those of December 1956, the revaluation proceeds of 7 billion rials held by the National Bank are excluded from the figures for both foreign assets and unclassified liabilities.

Eleven months ended November 1957.

Source: Based on data from International Monetary Fund, International Financial Statistics.

The monetary system’s claims on government less government deposits is used to represent net borrowing of the central government from the banking system. The increase in net borrowing is compared with money supply at the beginning of the year. In Argentina, Brazil, Chile, China (Taiwan), Dominican Republic, Ecuador, Haiti, Iran, Korea, Nicaragua, Pakistan, the Philippines, Syria, and Uruguay, it includes transactions of official entities. In Ecuador, transactions of local government authorities are also included.

Changes in foreign assets for most countries are gross, except for Brazil, Colombia, Egypt, Haiti, Korea, the Philippines, Syria, Thailand, Uruguay, and Venezuela.

This is the sum of the remaining items as given in the Monetary Survey in International Financial Statistics, and therefore the total of columns 2 to 5 in the table is equal to the percentage increase in money supply. The remaining items are usually unclassified assets less quasi-money and unclassified liabilities consisting mainly of capital. Counterpart funds are also included in Burma, Chile, China (Taiwan), Indonesia, Korea, and Viet-Nam; deposits of the UN in Korea; import deposits in Chile and Colombia; and prepayments for exchange in Indonesia, Nicaragua, and Paraguay.

This figure is in part a result of the withdrawal of Egyptian currency from circulation in the Sudan to an amount equal to approximately 6 per cent of money supply at the beginning of 1957.

Year ended June 1957.

Year ended September 1957.

Foreign assets were revalued in May 1957. In order to make the December 1957 figures comparable with those of December 1956, the revaluation proceeds of 7 billion rials held by the National Bank are excluded from the figures for both foreign assets and unclassified liabilities.

Eleven months ended November 1957.

Stabilization Programs, Development Policies, and Falling Export Prices

Several of the countries that have adopted stabilization programs in recent years have been able to make use of assistance from stabilization credits from abroad, which for some of them included stand-by arrangements and drawings from the Fund. The main outline of the program was similar in each country. It generally provided for the establishment of one or two fluctuating exchange rates in place of a complicated multiple exchange rate system, and included the curtailment of excessive credit expansion to both the private and the public sector and the limitation of wage increases, in order to break the price-wage inflationary spiral. Some progress was recorded in the application of all these programs, although in some countries they were seriously impeded when falling export prices placed additional strains upon the economy.

The slowing down of the rates of increase in the money supply and in the cost of living index gives one indication of the measure of success achieved by stabilization efforts. In Bolivia, the money supply, which had increased by more than 260 per cent in 1956, increased by only 27 per cent in 1957, and the cost of living index in November 1957 was 14 per cent less than at the end of 1956.

In addition to the efforts made to adjust to falling prices by taking appropriate monetary and fiscal measures, several countries were also able to negotiate external credits with a view to tiding over the period of stringency. Brazil, Cuba, Chile, and Colombia drew upon the Fund, and Peru in February 1958 obtained a new stabilization credit of $60 million in which the Fund, the U.S. Government, and private commercial banks participated.

On the other hand, the problem was aggravated in some countries, for example, Brazil and Colombia, by the attempts of the Government not only to maintain domestic prices and the incomes of the export sector through stockpiling purchases, but also to influence world prices by restricting exports. The steps taken for this purpose have been financed mainly by central bank credit.

Falling export prices affected the development programs of several countries, including Egypt, Pakistan, Mexico, and the Sudan. In general, these countries made determined efforts to prevent inflation through increased taxes and limitations imposed by credit restrictions upon private expenditures. Despite all these efforts, the emergence of inflationary pressures and rapid declines in foreign exchange reserves led a number of countries to cut back their development expenditures. In India, for example, less essential development expenditures were postponed, and the Government hopes to reduce the over-all budget deficit from about Rs 4 billion in 1957-58 to about Rs 2 billion in 1958-59. In Egypt, the Government sharply reduced development expenditures in 1957 and also improved its tax collection. Net borrowings by the Egyptian Government from the banking system, which in 1956 amounted to 21 per cent of the money supply, were reduced to 10 per cent in 1957.

Monetary, Fiscal, and Other Measures

Variable reserve requirements were used in many of the less industrialized countries during 1957 and early 1958 as a means of restraining credit. The wide use of this instrument in these countries can be understood from the fact that it may be effective even when there is no well-developed money and capital market. In Nicaragua the requirements were raised by stages in April and May 1957, from 16 per cent to 28 per cent for sight deposits and from 8 per cent to 28 per cent for time deposits; and in Colombia marginal reserve requirements were raised to 100 per cent in early 1958. To help ensure adherence to the reserve requirements, Peru began in January 1958 to levy a penalty interest rate on any deficiencies in commercial bank reserves. In Mexico, however, a simplification of the system of reserve requirements in July 1957 reduced them from their previous high level.

In order to supplement this method of credit restraint, and also to prevent commercial banks from replenishing their reserves through borrowing from the central bank, some countries placed ceilings upon the amount of rediscounts. For a short time during the first half of 1957, there was a complete cessation of rediscounting by the Central Bank in the Philippine Republic.

Besides restricting the availability of credit, some monetary authorities attempted to increase the cost of credit directly by raising the discount rate. During 1957 and in early 1958, six of the less developed countries increased these rates. The Reserve Bank of India increased its lending rate under the so-called Bill Market Scheme by successive steps from 3 per cent in March 1956 to 4.2 per cent in May 1957; in May the discount rate was also raised from 3.5 per cent to 4 per cent. The discount rate in the Philippine Republic was increased twice in 1957—in April from 1.5 per cent to 2 per cent and in September to 4.5 per cent. These increases marked the reversal of a cheap money policy which for several years had encouraged bank credit expansion and private investment in the Philippine Republic. In some of the less developed countries, where there is little or no rediscounting, the discount rate has little practical significance; in most of them, the absolute level of the rate, even where it has been increased, is still low in relation to the interest rates charged by the commercial banks.

Among the various kinds of selective credit control, that which requires an advance deposit by importers as a prerequisite for obtaining import licenses or other relevant documents was used extensively. The scope of these advance deposits (whose use is not confined to the underdeveloped countries) was expanded during 1957 in 11 countries in all parts of the world. Of 16 countries that use this device, there are 10 where the deposits required for all or some imports amount to 100 per cent or more of the value of the import.

In some countries, especially where the repayment of advance deposits is deferred until a specified period has elapsed, the purpose of advance deposits has been to withdraw purchasing power and, by operating primarily on the liquidity of importers, to reduce demand for imports in general; in other countries, an important objective has also been to impose severe restrictions on the import of particular commodities by using widely different rates of advance deposit for different commodities (in Chile the rate for automobiles reached 1,500 per cent). The general contractionary effect of the withdrawal of purchasing power was sometimes offset by simultaneous credit expansion by the banking system.

Attempts have been made in many countries to check credit expansion by moral suasion. Generally speaking, moral suasion has not proved very effective, except where the commercial banks realize that the central bank is also willing and able, if necessary, to adopt more stringent measures.

Fiscal measures, such as increased tax rates, were adopted in a number of countries. Chile and Paraguay raised taxes as part of their stabilization programs. Tax increases were planned in India, Pakistan, and the Philippine Republic in order to increase the supply of noninflationary finance for developmental expenditure. In Pakistan, the tax increases proposed in the 1958-59 budget were expected to increase revenues by Rs 240 million, which is equivalent to about 5 per cent of the money supply at the end of 1957.

The prevention or limitation of wage increases has been an additional element of inflation control both in the countries adopting stabilization programs and elsewhere, although in some countries it has not been found possible to prevent massive increases of money wages. In Argentina, for example, where a general wage increase of 25 per cent had been granted early in 1957, it was decided in May 1958, despite the Government’s determined efforts to stop further increases, to permit another general increase that brought the wage level to 60 per cent above the level of February 1956. Some measures of price control were also undertaken. In some countries, such as Paraguay, the abolition of most price and rationing controls was an important feature of the stabilization program, and additional price controls were imposed in only a few countries.

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