I The World Economy and the Fund in 1959-60
- International Monetary Fund
- Published Date:
- September 1960
The year ended April 1960 showed a continued upswing in world industrial activity and an increase in world trade. Industrial production in 1959 was greater by 10 per cent than in the recession year of 1958, and the value of world trade increased by 6 per cent, both increases being more or less continuous from about the middle of 1958. During this period of expanding business, the leading industrial countries had remarkable success in the delicate task of maintaining a high degree of economic stability, without having to place any severe restraint on the forces which help to sustain the expansion of output and real income.
During 1959 there was some recovery in the prices of many industrial raw materials, and particularly of metals. The prices of other products, however, particularly foodstuffs, declined. The general price level in many industrial countries remained virtually stable, partly because of the decline of food prices while the prices of services generally continued to rise. Moreover, as production in some countries approached the limits of capacity, the authorities took strong measures to ensure that inflationary developments should be avoided. The determination shown by the authorities and the high degree of stability of the cost of living have made a marked impression on the general public all over the world, and in many countries there has been a waning of inflationary psychology. After a long period of almost continuous inflation, the attainment of greater price stability requires difficult adjustments in attitudes and practices, including much closer attention to commercial and industrial costs.
Another important feature of the past year—to which the lessening of inflationary pressures has made a significant contribution—has been the marked strengthening of the payments structure of the world. Over a wide field there has been a return to practically full freedom for current payments and a great degree of freedom for ordinary commercial lending. All in all, there are good reasons for believing that, granted effective action to control any resurgent inflationary tendencies, and the avoidance of extreme creditor positions, the international payments structure that has been carefully built up over the past decade will continue to gain in strength, and that it will be able in the absence of major international disturbances to face successfully such tests as may arise.
The decision taken in December 1958 by 14 European countries (discussed in last year’s Annual Report) to make their currencies externally convertible was a decisive step toward the re-establishment of an integrated structure of world payments. With substantial improvements in the balance of payments of many of these countries, it was soon realized in the business world that this was a step that would not be reversed, but would lead to further relaxation of restrictions on payments. External convertibility provided the basis for the Fund decision in October 1959 that there was no longer any balance of payments justification for discrimination by members whose current receipts were largely in externally convertible currencies; this was followed by similar statements by the Contracting Parties to the General Agreement on Tariffs and Trade. Substantial advances were in fact made during the year in the elimination of such restrictions against the dollar area. Nevertheless, there is still considerable scope for the removal of discrimination, especially as applied to some nondollar countries.
The freeing of trade from the shackles of the postwar period, with increasing supplies of both primary and manufactured products, has created a situation in which international competition is making itself felt more and more in the pricing of goods and in the promptness with which orders can be met. During the first half of the 1950’s, there was increasing evidence that countries in Europe and elsewhere, whose economies had been greatly disrupted by the war, were regaining competitive strength in relation to the United States. This tendency was overshadowed for a time, however, by the boom conditions and the special political and exchange difficulties of the years 1956 and 1957. As these difficulties were overcome, the Western European industrial countries and Japan were able to earn large payments surpluses.
From 1950 to 1956 the United States had had annual payments deficits averaging about $1.5 billion. Following a year of surplus in 1957, U.S. deficits increased greatly in 1958 and 1959. During these two years, U.S. gold holdings fell by about $3 billion, and official institutions, banks, and others abroad increased their holdings of dollar balances by about $4 billion. The gold and dollars acquired by the industrial countries enabled them to replenish their reserves, and by bringing about a better distribution of international reserves, improved the world’s general liquidity position. Even after the recent additions to the gold and dollar holdings of other countries, the stock of gold held by the United States is still as large as the gold reserves of all other Fund members combined, and exceeds the total of their short-term dollar claims on the United States.
The U.S. authorities have emphasized the importance of achieving earnings on current account sufficient not only to pay for imports of goods and services but also to finance large and important outpayments for other purposes. To accomplish this objective, they have turned primarily, as others have done in similar situations, to measures of fiscal and credit restraint. As the 1957-58 recession was followed by an upturn of business, it became appropriate, from both an external and an internal point of view, to limit the expansion of credit and to aim at a budget surplus. For 1959 as a whole, the money supply was kept constant, and for the fiscal year 1959-60 the budget was balanced, after a deficit of about $13 billion in the preceding fiscal year. Action taken by other industrial countries helped to reduce the imbalance in international payments. These countries have gone far toward eliminating such discriminatory treatment of dollar goods as still remained, and they have repaid in advance large sums due to the United States on intergovernmental account. In addition, they have taken further steps to liberalize the outward movement of private capital and are recognizing their ability to assume more responsibility for aid to less developed countries. The measures taken, by the United States and by other countries, as well as the rapid expansion of production in Europe, are having an effect on the world payments situation. In the latter part of 1959 and the first quarter of 1960, there was marked improvement in U.S. exports; imports continued high. It appeared likely that the over-all deficit in the U.S. balance of payments would be considerably smaller in 1960 than in 1959. However, the continuing payments surpluses of some European countries present an important problem of imbalance in international payments.
In most of the Western European industrial countries and in Japan, industrial expansion has been rapid; in several countries unemployment has fallen to a low figure, and in some areas there has been a severe labor shortage, associated with a heavy demand for capital. Various measures have been taken to moderate the strain on resources; these have generally included an increase in the official discount rate, which in several countries has been raised to 5 per cent or more. Under the new regime of external convertibility, greater attention has to be paid to the influence of credit measures on the international movement of funds. Some of these movements have been helpful in bringing about equilibrium, and in some situations where they would not have been helpful, special measures have been taken, as in the Federal Republic of Germany, to discourage them.
It is too early to estimate accurately the extent to which the closer interdependence between national capital and money markets that has followed the establishment of external convertibility will lead to more extensive international movements of funds. This will depend in part on the policies of the leading countries, and in part on the extent to which the monetary authorities, commercial banks, and others may tend to shift their assets from market to market as relative interest rates change. On the whole, net movements of funds between markets seem not to have been very large. Such evidence as there is indicates that commercial bank balances have moved between certain centers in response to interest rate changes, and that companies of an international character have also been influenced by these changes as they seek markets where conditions are most favorable for their commercial financing. There has been no vast movement of “hot money” such as often exerted a disturbing influence in the interwar period, when funds were transferred from country to country, not in response to interest rate differentials, but because of fears and forebodings of a more general character.
An important feature of the wider freedom in international payments has been the increased scope permitted to banks in a number of countries to hold foreign exchange and to engage all over the world in credit operations, particularly in U.S. dollars. During 1959, the commercial banks of other countries increased their balances in the United States by $1.4 billion, compared with an average of some $200 million per year in the preceding decade. These funds in the hands of banks have made for increased competitiveness in commercial financing, a counterpart to the competitiveness which has developed in commodity markets in recent years.
In an ever-changing world there is always the possibility that, even when appropriate policies have been adopted, some countries will have balance of payments difficulties from time to time. Movements of capital may mitigate the difficulties, but these movements cannot always be counted upon, and under certain unfavorable conditions they may even intensify the imbalance. In general, gold and foreign exchange reserves, supplemented by drawing rights in the Fund, should make it possible for countries to deal with such imbalances as may occur, mainly through fiscal and credit policies, without any need for the hasty introduction of other measures that may have damaging consequences.
The increase in the Fund’s resources during the past year was an important contribution to the consolidation of the world’s payments system. On April 30, 1960 the Fund’s resources amounted to more than $14 billion, of which nearly $3 billion was in gold (including $500 million temporarily invested in U.S. Government obligations) and about $10.6 billion was in currency. Of the latter sum, more than $7 billion is in the currencies that are most usable in the Fund’s operations, viz., U.S. and Canadian dollars and the currencies of the European industrial countries and Japan. The Fund, therefore, has at its disposal effective international assets to the value of at least $10 billion. While the Fund’s assets so measured are equal to nearly 20 per cent of the aggregate reserves of all member countries (which were about $53 billion at the end of 1959), their significance is greater than this percentage may suggest. The resources that its members have provided for the Fund are available as a second line of reserves under the policies and practices agreed for their use when members encounter temporary balance of payments difficulties. The direction in which they are effectively used can be continuously adapted to the changing conditions of the world economy, the practice of repurchase ensuring that Fund resources which have served their purpose in one country will later be available elsewhere if the need should arise.
The need for use of the Fund’s resources is certain to vary widely over time. A period of stress in any part of the world may lead to heavy drawings; these are generally followed by other periods in which the demand for drawings is less but the amounts repurchased are substantial. The Fund is now well on its way toward the completion of the second full drawing cycle in its brief history. The drawings concentrated in the years 1947 to 1949 were substantially repaid during the less active years from 1950 to 1955. Most of the larger amounts made available in 1956 and 1957 ($1,800 million in drawings plus about $800 million in unused stand-by facilities) have since become available again for further use. The greater part of the stand-by arrangements granted during that period has been canceled or allowed to expire. Repayments of amounts drawn totaled $1,100 million during 1958, 1959, and the first four months of 1960; arrangements with members for further repayments should increase the total to at least $1,500 million by the end of April 1961.
The widespread improvement in the monetary situation has made it a matter of practical importance to consider the conditions under which some members which have availed themselves of the transitional arrangements set forth in Article XIV of the Fund’s Articles of Agreement might assume the obligations of Article VIII, Sections 2, 3, and 4. Under Article XIV, members are entitled to maintain and to adapt restrictions on payments and transfers for current international transactions without obtaining the prior approval of the Fund. Once a country assumes the obligations of Article VIII, it has to obtain from the Fund not only the prior approval for the introduction of any restriction on such payments and transfers which is generally also required by members availing themselves of Article XIV, but also approval for any such restrictions that may remain at the time of the assumption of the obligations of Article VIII. The acceptance of Article VIII will also have significant consequences for the Fund’s financial transactions. The currencies of certain countries which avail themselves of Article XIV have been increasingly drawn from the Fund, but these currencies cannot be used to make repurchases, and members’ holdings of them are not included in the computation of monetary reserves for determining repurchase obligations. The acceptance of the obligations of Article VIII will make possible wider use of the currencies of the members which take this step.
After a close examination of the legal and policy questions connected with a member’s acceptance of the obligations of Article VIII, the Executive Directors adopted the decision which is reproduced in full in Chapter II. The decision is intended to serve as an additional guide to members in pursuance of the purposes of the Fund, as set forth in Article I of the Articles of Agreement. It is expected that, when the authorities of member countries are contemplating acceptance of the obligations of Article VIII, Sections 2, 3, and 4, they will find it useful to consult the Fund on questions that arise in this connection.
The Executive Directors have agreed on a broad outline of the methods that the Fund and member countries should employ as more and more countries assume the obligations of Article VIII. Special attention has been devoted to the question of the Fund’s contacts with its members. While consultations with the Fund under Article VIII are not mandatory except in certain circumstances, the Fund is able to provide technical facilities and advice, and, to this end or as a means of exchanging views on monetary and financial developments, there is great merit in periodic discussions between the Fund and its members—even though no questions arise involving action under Article VIII. Such discussions would be planned between the Fund and the member, including agreement on place and timing, and would ordinarily be held at intervals of about a year.
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During the past year, the markets for many primary products have continued weak. The prices of some industrial raw materials have recovered part of the loss they suffered in the 1957–58 recession, but the prices of foodstuffs have, on the whole, tended to weaken even further, and the stability of world market prices as a whole has reflected these divergent tendencies. The downward trend of prices presents serious problems for many of the countries whose foreign exchange receipts, for the most part, come from exports of primary products, and especially for those which have embarked on programs of rapid economic development. In 1959, however, helped by the industrial recovery elsewhere which stimulated demand for many of their exports, the less developed countries added to their aggregate reserves for the first time since 1956; in several countries the improvement was closely linked with the achievement of greater internal stability.
Increasing attention is being given by international organizations to the problems which confront the primary producing countries as a result of wide price fluctuations. Broadly speaking, remedies have been sought along two lines which are not mutually exclusive: attempts to obtain greater price stability for important primary commodities by such actions as international buffer stocks or commodity agreements, and measures aimed at compensating the balance of payments effects of such fluctuations as may occur in export prices. The second approach provides scope for action by the Fund, and there are numerous instances in the Fund’s history where a member has purchased exchange from the Fund because of the difficulties caused by a decline in its export earnings. At the request of the UN Commission on International Commodity Trade, the Fund in April 1960 presented a study of its policies and procedures in relation to the compensatory financing of commodity fluctuations. Its finding was that “members of the Fund that are taking appropriate steps to preserve internal financial stability and to maintain their balance of payments in equilibrium, taking good years with bad, and that are otherwise making satisfactory progress toward the fulfillment of the Fund’s purposes can anticipate with confidence that financing will be available from the Fund which, in conjunction with a reasonable use of their own reserves, should be sufficient to enable them to overcome temporary payments difficulties arising from export fluctuations.” Consideration was given in the study to the suggestions sometimes made that Fund assistance in connection with price fluctuations should be made available according to some automatic formula, or that some separate form of Fund assistance should be set up to deal with export fluctuations as distinguished from other possible causes of balance of payments difficulty; it was found that neither of these suggestions would provide a practicable or desirable alternative for helping countries with the problem of fluctuations in exports.
It is also evident from the study that, given the relative mildness of the postwar recessions, the most pressing problem for primary producing countries in recent years has not, on the whole, been that of finding compensatory finance in connection with short-run fluctuations in export proceeds, but rather that of establishing a satisfactory long-run trend in the volume and the prices of exports and preventing inflationary pressures from causing imports to expand beyond the available resources of foreign exchange. While conditions vary from country to country, the most troublesome problems have thus generally been those associated with development and with the maintenance of stability.
The Fund can play and has played a vital role in relation to the development of the less developed countries. Its resources are available for periods of up to three to five years to assist countries in temporary balance of payments difficulties, with the primary objective of gaining time for the countries assisted to take effective corrective measures. Moreover, access to Fund resources in accordance with the established principles and policies applicable to their use is likely to improve the prospect that any temporary difficulties encountered in the course of development can be surmounted without harm to the economic structure of the country itself or to its trading partners. The Fund’s contribution to development is, therefore, indirect; it is, however, no less important for that reason. Through the Fund’s regular contacts with its members, the chances are increased that development plans and policies will be applied within a framework of financial stability, and thus under conditions that are free from the distorting effects of inflation.
The progress of the stabilization programs with which the Fund has been most directly concerned has, in general, been reassuring. In several countries, the increase in monetary reserves has been larger than had been foreseen. This has not only helped to strengthen confidence in their currencies, but has also made possible more decisive steps for the liberalization of trade. On the other hand, in some of these countries there has been a temporary slowing down in the expansion of production, which has given rise to a certain amount of impatience.
In countries whose economies have been tuned for many years to upward price movements, and where therefore deep-seated distortions have to be corrected, it may not be possible to establish an environment of financial and economic stability all at once, or without transitional difficulties and delays. These temporary difficulties, however, should be weighed against the consequences of perpetuating the waste and injustice inevitably associated with inflation. Once conditions of financial stability are restored and confidence is thus assured, both at home and abroad, a reliable basis for sustained economic growth has been established. The extent to which specific measures are required to initiate or accelerate expansion on sound lines will depend on the conditions in each particular country. In some countries, resolute support of the stabilization program will need to be followed by resolute efforts to increase productivity and savings.
In these circumstances, the responsibility of the more highly developed countries is not confined to the provision of capital for financing development elsewhere, or to the maintenance of more stable market conditions for primary products. Their general tariff and other trade policies are also of great importance. In the future, as in the past, economic development will call for continuous changes in the structure of international trade. These changes can take place only as more liberal trade and tariff policies are widely adopted, and as appropriate safeguards are applied so that the disposal of agricultural surpluses does not disrupt the normal channels of trade. In particular, the effective servicing of development loans would be rendered more difficult—or even made impossible—if the trade policies of the lending countries from which development financing is expected were not adjusted so as to permit easier entry for the products that the less developed countries are best fitted to produce.
It is therefore essential that, in the negotiations for regional arrangements in Europe and elsewhere, full attention should be paid to the importance of reducing trade barriers to provide greater opportunities for an expansion of world trade, not only in industrial, but also in primary, products. It is hoped that the arrangements now being put into effect in various parts of the world may permit such reductions. The more widely the reductions can be extended, the better will be the prospects for a sustained growth of world trade to the benefit of all concerned. It is also important that any tendency to resort to bilateral payments arrangements should be resisted.
Trade restrictions, while generally harmful to the world economy as a whole, will at best serve only the short-term interests of important economic groups. Their elimination requires, therefore, the most determined action by governments. The introduction of external convertibility has ensured that most of the world’s trade is now being settled in freely convertible currencies. A firm monetary basis has thus been provided for the adoption of liberal and nondiscriminatory commercial policies.