I. General Characteristics of the Year
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1959
The past year witnessed the most important single achievement of the postwar period in the field of exchange restrictions. This was the establishment of external or nonresident convertibility of the major European currencies. While in some respects this step can be regarded merely as official recognition of an already existing measure of convertibility, it is an important move in the transition from the postwar era of restrictions to a freer exchange system.
During 1958, countries outside the United States added some $4 billion to their gold and dollar reserves. This was the largest of an almost uninterrupted succession of annual increases since 1949, aggregating about $14 billion for the nine years as a whole. Naturally, in 1958 as in previous years, all countries did not fare alike. The increases in reserves were concentrated in the industrialized (mainly European) countries, while the reserves of nonindustrialized countries on balance declined. Two divergent trends operated during the year: broadly speaking, the industrialized countries gained in strength, both economically and financially, while the less developed countries continued to experience difficulties—to some extent aggravated by a weakness in the prices of primary products. Although there has been some recent recovery in the prices of certain primary products, the distinction between the two groups of countries has been so marked that there has rarely been a year in regard to which it is more difficult to make any general statements applicable to the majority of countries. One general statement that can safely be made is that, whatever their varying fortunes, most countries have been increasingly anxious to arrest inflation and to establish more stable monetary conditions.
The recession in the United States was halted in the spring of 1958, and recovery gained momentum in the second half of the year. Imports, which had been maintained at a high level throughout the recession, began to rise again with the recovery, and investment abroad continued at a high level throughout the year. Exports, on the other hand, continued to decline. As a result of these developments, many other countries, particularly industrialized countries, were able to achieve a substantial balance of payments surplus with the United States.
The Western European countries in 1958 consolidated the strength of their economies which had been steadily built up in the preceding years. They had, by and large, eliminated the inflationary pressures which had endangered their payments position in much of the postwar period, and achieved the monetary conditions necessary for a strong balance of payments position. The United Kingdom, for the first time in the postwar period, achieved a surplus in its foreign trade, as well as in its current balance of payments. The United Kingdom and, indeed, Western Europe as a whole, benefited from more favorable terms of trade, but there is no gainsaying the underlying strength that had been achieved by 1958.
All of these developments, both in Europe and elsewhere, combined to make possible the rise in gold and dollar reserves noted above and to bring about increased confidence in the strength of the Western European currencies. The decision taken at the Fund’s Annual Meeting in New Delhi in October 1958 to increase the Fund’s quotas was of considerable importance in reinforcing this increased confidence. It gave promise of a larger secondary line of reserves which could be particularly helpful in any emergencies that might arise in the future.
For these various reasons, the European countries felt better able at the end of 1958 than at any previous time since the end of World War II to make a major monetary move toward the elimination of the distinction between dollar and non-dollar currencies in their foreign exchange arrangements. With the disappearance of this distinction, and with the transition from the European Payments Union to the European Monetary Agreement, these countries were able to merge their foreign exchange markets for dollars and the externally convertible European currencies, making greater use of the arbitrage operations of their commercial banks. The countries which joined in the convertibility move at the end of 1958 did not, however, do away entirely with exchange controls and with few exceptions they continue to maintain some restrictions on the ability of their residents to purchase foreign exchange; these apply particularly to exports of capital, but in some cases also to certain types of current transaction. Convertibility, moreover, does not by itself necessarily produce a reduction in trade restrictions, but this move has been both preceded and followed by further measures of liberalization.
Nonindustrialized countries which have been associated in a monetary area with a European country that introduced external convertibility also participated in the move to external convertibility. Countries which have not been associated with European monetary areas have also benefited from the steps taken, in that their holdings of currencies that are now convertible for nonresidents can be more freely used. The moves made in Europe at the end of 1958 have therefore had a wide impact.
In other respects, however, 1958 has been a year of difficulties for the less developed countries. Declining export receipts created problems, especially at a time when investment programs called for increased imports of raw materials and machinery and when inflationary pressures often continued to make themselves felt. Moreover, in many countries increasing amounts of foreign exchange were required to meet foreign debt service. Even so, in one country after another considerable efforts have been made to find solutions to these rather formidable problems. Not a few of these countries are putting into effect comprehensive stabilization programs, including the adoption of unitary rates in place of complex multiple rate systems; and a number of others are taking somewhat less comprehensive measures to achieve a better order internally and in their foreign exchanges. Some of these countries have benefited from an inflow of capital from abroad in the form of direct investments and loans obtained both on private and on official account, either directly from governments or through international agencies. The efforts made in the countries themselves have thus been combined with assistance from abroad. Although the situation with respect to some commodity prices, continued inflationary pressures, and low reserves may, in particular countries, present difficulties not easily overcome, attention is increasingly concentrated on these problems, with a view to finding the proper solutions. The idea is gaining ground that economic growth and social welfare cannot otherwise be secured in other parts of the world. This approach, together with the internal and external measures referred to above, provides the basis for expecting that further progress can be made.