Chapter I. Restrictions under Existing Conditions

International Monetary Fund. External Relations Dept.
Published Date:
September 1951
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1. Introduction

In April 1950 the International Monetary Fund transmitted to its members and to the Governors of the Fund its first report on exchange restrictions, prepared in accordance with the provisions of Article XIV, Section 4, of the Fund Agreement. In his letter of transmittal, the Chairman of the Executive Board and Managing Director of the Fund noted the obligations of the Fund to report on exchange restrictions as “part of the Fund’s task of assisting in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.” The Chairman also noted that the progress toward these objectives of the Fund had not been as conspicuous as he would like to report. He went on to say that the Fund recognized many difficulties which had caused the maintenance and spread of restrictions in international economic relations during the period of postwar transition and that “if trends of improvement in the underlying world conditions continue, members should find the task of removing exchange restrictions less difficult in the future. I can pledge that in this task the Fund will continue to assist them in every way possible.”

During the year since the preparation of this First Annual Report, there have been numerous developments in the field of restrictions. These are discussed in Part II of the present Report, which indicates an increasing willingness to relax restrictions, both formally and by administrative action. Even more, there have been changes in the underlying economic and financial bases of restrictions, with the introduction of new factors both favorable and unfavorable to the achievement of the Fund’s objectives. As this Report is being written, it is recognized that some of the essential characteristics of the problem of exchange restrictions are being drastically altered. For many countries, the problem is becoming increasingly one of shortages of supplies and availabilities of future supplies, and less and less one of inability to finance foreign expenditures. Export controls, based on national and international decisions, are becoming increasingly important in determining the pattern of world trade and payments. Uncertainties and anxieties resulting from the strained international situation and rearmament programs have posed the question as to whether the Fund should continue its “task of assisting in the establishment of a multilateral system of payments . . . and in the elimination of foreign exchange restrictions”.

Even in these new circumstances it is the view of the Fund that, if countries have favorable balance of payments conditions and are experiencing increases in their reserves providing a reasonable basis of exchange stability, it is in their interest, and in that of the international community, to relax or remove restrictions unless such action would produce conditions justifying the intensification or reintroduction of those restrictions. The Fund is keenly aware of the difficulties of a new character which confront a number of its member countries, but nevertheless it believes that the very general improvement in balance of payments positions and prospects of its members justifies a relaxation or removal of restrictions and, particularly, of discrimination. Such a relaxation would have short-run benefits in increasing the quantity of goods available for domestic consumption, thus restraining inflation, and would have benefits outlasting the present emergency by permitting a more economic use of the world’s resources. At the same time, the Fund recognizes that the new difficulties mentioned above are leading some countries to divert a higher proportion of their productive efforts to rearmament, to give greater attention to strategic and security necessities, to place emphasis on obtaining adequate supplies of raw materials or other essential goods, and to maintain reserves adequate to cover deficits in balances of payments which may arise from relatively higher prices for imports or from a prospective shortage of exportable goods.

2. Advantages of Relaxing Restrictions under Existing Conditions

Greater reliance on international division of labor made possible through the relaxation or elimination of restrictions and discriminatory practices (i.e., greater multilateralism) can play an important part in enabling limited resources to produce a greater quantity of goods and services. In the world of today, supplies available to most countries, whether rearming or not, will be limited. After any slack which may exist has been taken up, the much desired increases in output can only come from increased efficiency. Historical experience indicates that greater efficiency or productivity in the economic field is encouraged by an international economic environment relatively free from hampering restrictions and discrimination. Even under existing difficult circumstances, to the extent that countries can free themselves from unnecessary restrictions, they will help to create an environment more favorable to increased output. Countries not engaged in substantial rearmament efforts would be enabled to maximize their access to needed resources. Rearming countries would be enabled to curtail the reduction in consumption which the diversion of resources to armaments would otherwise entail.

The present accelerated demand gives rise to problems of inflation in both the countries exporting raw materials and the countries importing them and engaging in rearmament programs. At a time when maximum production and minimum barriers in the way of imports may well be important elements in combatting inflation, the continuation of restrictions tends to provide incentives for uneconomic production and to place hindrances in the way of obtaining needed goods for the minimum possible expenditure of resources. The maintenance of the maximum possible multilateralism would bring some external discipline to bear on inflation and the wastage of resources it causes. In this way, it creates a more favorable environment for the adoption of the fiscal, credit and other policies needed to combat inflation. Thus, the problem of inflation highlights the necessity of seeking the greatest efficiency in the use of resources under present conditions.

Countries undertaking large armament programs need to examine the existence of uneconomic production within their borders. It is sometimes argued that the significant relaxation or abandonment of restrictions—if they have been effectively restrictive—will have adverse short-run effects upon production. Production may decline temporarily as resources move from industries previously protected by restrictions to those which are more efficient and in a better competitive position. Countries undertaking substantial armament burdens may well feel that they cannot afford even a temporary loss of production in industries of importance to rearmament. For other industries, however, the cost to the economy resulting from existing restrictions must be recognized. Restrictions tend to keep resources in uneconomic uses and to incorporate higher costs and inefficiency into production. Furthermore, the benefits of more economic use of resources are long-lived, while any costs of transfer are temporary.

Increased multilateralism would also greatly serve the interests of countries which are not undertaking substantial rearmament programs. These countries are now in a better international financial position to take the domestic measures which could place their international economic relations on a sounder, more efficient and durable basis and (within the limits of real availabilities) may be enabled to continue their developmental programs. In the short run, they would obtain increased benefits from trade. In addition, such policies could contribute to a strengthening of the real international economic position of these countries.

Thus, in brief, the needs for maximizing efficiency and obtaining imports as cheaply as possible favor the reduction of restrictions and the maximizing of progress toward multilateralism. It is difficult to estimate the economizing of real resources which would be possible as a result of a greater return to practices of multilateralism. It is felt, however, that these savings could be substantial. In a world confronted by scarcities, all savings are important. Fears of future shortages of supply, and growing difficulties of securing desired imports, already are acting as pressure on countries to relax restrictions and discriminatory practices. Advantage should be taken of the existing conditions which, in a number of countries, are favorable for the relaxation of restrictions and for pursuing other measures designed to achieve and maintain higher levels of output. The aim should be to provide the basis for a sound international financial position which will enable countries to minimize the need for restrictions in the future.

3. Favorable Developments for Relaxation of Restrictions

By the end of 1950 there had been a substantial lessening of many of the financial obstacles which had previously been hindering the removal or even the relaxation of restrictions—particularly restrictions against “hard currency” countries—and hindering the achievement of convertibility.

One of these obstacles had been the existence of inappropriate exchange rates. Exchange rate difficulties, however, were largely removed in many countries by the currency devaluations of September 1949. In 1950, certain problems were still to be found in expanding sales to “hard currency” markets, but devaluation was tending to bring about a pattern of world prices and trade more compatible with the relaxation of restrictions.

The beneficial effects of devaluation could have been quickly dissipated by inflationary price rises in the devaluing countries. This, however, did not occur—although prices did rise somewhat, in part reflecting the increasing cost of imports as a result of devaluation. Despite the persistence of inflationary conditions in some countries, the general overcoming of the problem meant the reduction of excessive import demands and the encouragement of higher export flows. Rearmament demands for raw materials have resulted in rising prices and reintroduced the problem of inflation in a number of both exporting and importing countries. The more direct effects of rearmament in those countries where it is important have also contributed new tendencies toward inflation. This represents a significant danger for the future. Nevertheless, the beneficial effects of devaluation still substantially remain.

Fundamental to the overcoming of the inflation obstacle has been the increasing ability of the non-dollar world to supply the goods and services it required. Viewed more directly, the higher level of world production has meant that the “soft currency” countries have been able to reduce their dependence upon “hard currency” sources of imports; at the same time, goods and services have been available to increase exports to “hard currency” countries. By the end of 1950, recovery from the effects of World War II had been substantially achieved. Evidence of the continuance of war-induced difficulties was still to be found in various countries. Most of the world’s productive system, however, had been put on a more normal basis, making possible the re-establishment of more normal trading relations. Badly disrupted economies had been rebuilt and had been able greatly to reduce their dependence on extraordinary assistance from the Western Hemisphere.

Another obstacle which had existed was the fear or expectation that U.S. demand might slacken. A mild decline in U.S. business activity in early 1949 was accompanied by a considerable drop in U.S. imports. In the first half of 1950, however, U.S. demand was extremely strong. By the end of the year, the rearmament program had assured the maintenance and expansion of U.S. import demand for some time to come. This applies not only to demand for raw materials but also, as domestic shortages grow, to demand for imported manufactures. Rearmament abroad may limit the expansion of the volume of manufactured exports to the United States and to third countries where U.S. exports can no longer satisfy demand. But the fear of a slackening or sharp fall of demand in dollar markets has greatly diminished.

The year 1950 saw a remarkable improvement in the world’s payments situation, especially vis-a-vis the United States, and an associated increase in exchange reserves. These developments represented a substantial easing of the financial difficulties which hindered the partial or complete removal of restrictions, particularly discrimination, and the restoration of convertibility. Furthermore, this improvement began before the Korean hostilities and rearmament.

In the last quarter of 1949 and the first half of 1950—i.e., in the period between the currency adjustments of September 1949 and the outbreak of hostilities in Korea—there was a general movement in the direction of greater equilibrium in the payments positions of most countries of the world. Import restrictions still worked to limit purchases of goods originating in the United States and other “hard currency” countries, such as Canada. Nevertheless, the basic payments problem which had plagued the world throughout the postwar period—the so-called “dollar shortage”—was substantially alleviated even before the outbreak of hostilities in Korea.

Between the first half of 1949 and the first half of 1950, the U.S. surplus on goods and services was reduced from $3,797 million to $1,515 million. This change resulted from a decrease in U.S. exports of $1,851 million, a rise in imports of $234 million, and a fall in the net income from services of $197 million. However, the international financial effects of this change are better seen after the exclusion of ECA grants and other “unilateral transfers”. On this basis, there was, in the first half of 1949, a U.S. current surplus of $593 million. In the first half of 1950 this situation had been reversed, and there was a U.S. deficit of $859 million.

The improvement in accounts vis-a-vis the United States between the first half of 1949 and the first half of 1950 was experienced by all areas, although in different degrees. Further, on the whole, countries other than the United States also improved their trading positions with relatively “hard currency” countries other than the United States, such as Canada, Belgium-Luxembourg, Western Germany and Italy. While there were important exceptions, a general improvement in the world’s payment situation is indicated. Especially encouraging were the emerging surpluses of certain of the less developed areas with the United States. Once again, countries in Western Europe faced the possibility of financing deficits with the United States, at least partially, by the development of surpluses with these other areas.

The reduction of payments imbalance was reflected in a general increase in reserves of gold and U.S. dollars held outside the United States. After growing fairly steadily since the end of the war, the U.S. gold stock dropped by $397 million from September 30, 1949, to June 30, 1950. In addition, about $400 million probably was added to non-U.S. monetary stocks out of new gold production. At the same time, other countries increased their holdings of U.S. dollars. Short-term liabilities to foreigners reported by banks in the United States rose, in the nine months ending June 30, 1950, by $848 million, of which $653 million was in “official holdings”. Thus, between September 30, 1949, and June 30, 1950, the gold and U.S. dollar reserves of countries other than the United States appear to have risen by over $1,400 million. Non-U.S. external holdings of Canadian dollars also appear to have risen.

The outbreak of military activity in Korea and accelerated armament programs have produced varied effects, as, for example, sharp increases in prices of raw materials, and introduced a number of uncertainties discussed below. The immediate effect, however, was to accelerate the already occurring general improvement in the world payments situation, especially vis-a-vis the United States.

In August 1950 and again in October, the United States registered import surpluses on merchandise trade account—for the first time since June 1937.1 These import surpluses resulted from sharp increases in U.S. imports which rose to record levels and even offset some increase in exports, which had previously fallen. The U.S. current deficit, taking account of ECA grants and other “unilateral transfers”, rose from $859 million in the first half of 1950 to $1,504 million in the second half. Further, the second half of the year showed very heavy outflows of U.S. private capital, totalling $901 million (net) on long-and short-term. Countries other than the United States also improved their trade positions with Canada. Canadian imports from these countries exceeded exports in five of the six months of the second half of 1950.

Thus the gold and dollar exchange reserves of countries other than the United States have experienced an accelerated increase since the outbreak of hostilities in Korea. The U.S. gold stock fell by $1,511 million in the six months June 30 to December 31, 1950. Short-term liabilities to foreigners reported by banks in the United States as “official holdings” rose by $173 million between June 30 and December 31, 1950. New gold production available for monetary stocks also added to the gold and U.S. dollar reserves of countries other than the United States.

The same factors tending toward the elimination of the so-called “dollar shortage” have worked toward the disappearance of the distinction between “hard” currencies and “soft” currencies and of the distinction among various “soft” currencies. The Sterling Area, in particular, has greatly bettered its position vis-a-vis many countries whose currencies were previously relatively “hard”. Sterling has emerged as a much “harder” currency. The previous tremendous gulf between “hard” and “soft” currencies, which has been a very substantial obstacle to the restoration of convertibility, seemed to be narrowing markedly at the end of 1950.

The improved position of sterling and the demands for Sterling Area commodities have meant the rapid reduction of the “overabundance” of sterling. Working against this general improvement are the increasing liabilities in sterling which the United Kingdom is incurring to various segments of the Sterling Area as a result of U.K. imports and the acquisition by the Exchange Equalization Account of gold and dollars earned by other sterling countries. But countries are now much less anxious to dispose of their sterling holdings, and there is much less willingness on the part of holders of sterling to offer it for sale at considerable discounts than was previously the case. The greater demand for sterling has facilitated the developing settlement of the sterling balance problem. To the extent that the holders of these balances now want to hold them, the problem tends to disappear. In the latter part of 1950 and early 1951, arrangements were being worked out to release or settle over a period of years a number of large holdings of sterling balances which had accumulated during the war.

The improvement in the payments positions and the increase in gold and dollar reserves of countries outside the United States, however, have not been even. Certain countries have not been able to take advantage of increased demand for imports in the United States and other relatively “hard currency” areas. Not all commodities are equally affected by the increase in demand and some countries may continue to have difficulties in expanding exports sufficiently to overcome their persistent balance of payments difficulties.

Nevertheless, the betterment in the financial position of many countries other than the United States during 1950 has been striking. At the same time, there has been a cessation or tapering off of the Marshall aid available to some countries. Recognition of difficulties still in existence, however, does not detract from the magnitude of the general betterment. The extent of the improvement has made financially possible a considerable relaxation of restrictions and an approach toward convertibility. The nature and magnitude of the action which has become financially possible varies among different countries. For some, the new situation means that restrictions could be eliminated. For others, there could be significant relaxation, while there remain some countries where financial conditions are such that it is still not possible to undertake any significant relaxation of restrictions.

It will be seen in Part II that relaxation occurred during 1950 in a number of countries. In the latter part of the year, there were tendencies to increase the amount of their imports. In many countries, however, the extent of this action would not yet appear to have been commensurate with the financial improvement. Especially, the marked improvement of the gold and dollar positions of many countries would seem to remove the basis of most currency discrimination on current transactions which continues to be practised to a considerable degree.

Thus, for many countries, the balance of payments reasons for restrictions on current transactions have been greatly reduced, if not eliminated. Recognition must, however, be given to the uncertainties of the present situation and to the impediments to the removal or relaxation of restrictions. It is, thus, appropriate to begin with a consideration of the overriding strategic consideration which has developed since the outbreak of hostilities in Korea. For a number of countries it may be assumed that any future policies on restrictions will necessarily take place within a framework encompassing a substantial rearmament program.

4. Strategic Considerations Affecting the Use of Restrictions

The outbreak of hostilities in Korea and subsequent military and political events have introduced, for a number of countries, new considerations which affect their international economic and financial relations. Under existing circumstances, it may be necessary for countries to retain their control machinery and to maintain certain restrictions as weapons of economic warfare and security; however, the nature of such restrictions may well differ markedly from those previously maintained.

Security considerations may lead to the diversion of purchases away from the cheapest markets to those—either domestic or foreign—which are regarded as safer and more likely to remain open. The need to insure supplies may bring international arrangements on allocation of scarce commodities. Strategic considerations may also dictate the limitation and channelling of exports. Scarce supplies may be kept at home in order to insure that they will be available for rearmament efforts and for essential civilian uses. Further, certain foreign assets may be subjected to controls lest their uncontrolled use assist potential enemies.

Closely related to direct strategic requirements is the need for maintaining levels of exchange reserves and, in some cases, increasing them further so that essential imports can be maintained at all times. While military shipments may be financed in such a way that they do not result in large-scale indebtedness nor in dangerous losses of reserves, these problems may add to the other strategic impediments to the removal of restrictions under present conditions.

In certain cases, strategic considerations may well require the retention of control machinery, even if it is not required for financial reasons. The prevention of transactions against the strategic interest may require the continued surveillance of both current and capital transactions—the regulation of international capital movements is already provided for in Article VI, Section 3, of the Fund Agreement.

Such action, however, could be entirely compatible with a substantial relaxation of restrictions which now exist and which were introduced and developed for reasons unrelated to present strategic considerations. The desirability of retaining the control machinery, in the case of certain countries, does not carry with it the necessity of retaining for strategic reasons all or most existing restrictions. Countries limiting imports of available goods because of financial or protectionist reasons might well be able to relax or remove these restrictions at the same time as they take measures to implement an international agreement on distribution of scarce materials.

It is recognized that the implications for restrictions of strategic requirements will vary greatly from country to country, depending upon such factors as the amount of rearmament undertaken, the character and value of imports needed for rearmament, the dependability of sources of supply, and other similar factors. The apparent needs to insure supplies in the face of possibility of war, to maintain production, and to accumulate additional exchange reserves, all may seem to argue for maintenance of restrictions. In the case of certain countries these might even seem to argue in favor of increasing bilateralism. But, the continued use of restrictions in sectors of the domestic and international economy beyond the point required by strategic necessities runs a grave risk of unnecessarily losing the advantages of increased output and efficiency which would come from increased freedom in international transactions. Short of full and general mobilization in many countries, what may roughly be called the civilian sector of the economy will still be important and much of international trade could and should still take place on a price basis. Some controls over international economic relations may well be inevitable in light of existing political and strategic necessities. However, countries whose balance of payments and reserve positions have improved should insure that restrictions are not maintained which were previously imposed for financial reasons and which are not necessary for strategic reasons.

Of special importance for restrictions is the fact that some countries which are of major importance in the world economy are bearing a great share of the rearmament burden. The pressure of rearmament and security needs tends to curtail the availability of goods for export, and may even involve rather severe limitations on exports. However, if these countries are to preserve the international use of their currencies, it is in their interest to combat inflation and to maximize the availability of goods for export. In all this it should be noted that the measures taken to combat inflation and to make goods available for export will affect the willingness of other countries to hold the currencies of these exporting countries engaging in large rearmament programs. The decisions of these countries will necessarily have an important effect on the policies which can be pursued by other countries.

Closely related is the more general problem that the assurance of supplies and the combatting of inflation may appear to call for both a relatively liberal import policy and a restrictive export policy—obviously inconsistent on a world-wide scale. If countries restrict exports to make more goods available at home, they must recognize that this will affect the ability and willingness of other countries to provide them with imports.

Although difficulties of this sort may be inevitable under present circumstances, efforts should still be intensified to avoid losing the gains from international trade at a time when they are so important. In particular, the expected long duration of the emergency situation calls for the minimizing of practices, directly or indirectly, not in the long-run interest of the countries undertaking them. The adoption of full restrictive controls today will tend to mean that they are retained for the duration of this long emergency. Further, even unnecessary restrictions will be difficult to remove in the post-emergency situation, experience showing that, once restrictions have been in force for a considerable period, their removal is extremely difficult even with favorable financial conditions.

5. Other Effects of Rearmament

In addition to the strategic considerations affecting the needs for and the types of restrictions, other effects of rearmament must be taken into account. Rearmament in certain countries will tend to increase their demand for imports and to reduce their ability to export. What offsetting effects this will have on the improved payments position of countries in Western Europe and the British Commonwealth remain to be seen. They will depend on the extent to which rearmament goods are provided by mutual assistance programs, on the effectiveness of efforts to maintain exports and on the scope of the armament effort. Of particular importance will be the measures taken to cope with the inflationary impact of the rearmament programs. But, in any case, for the world as a whole, indications are that the present trend of rising gold and dollar reserves in countries outside the United States will probably continue for some time, although some countries (particularly other rearming countries) may not share or share equally in this gain.

An associated problem is the inflationary effect of the increase of exports and of export prices. This bears initially with greatest force on the countries which produce primary products. Unless these countries take adequate measures to deal with the problem of inflation, they may find that the impact of the increase in export prices and export proceeds tends to generate a new inflationary spiral. This danger is greatest where postwar inflationary developments had never been halted. Under these circumstances, the demand for imports (augmented by the desire to buy in anticipation of scarcities) might tend to grow rapidly.

Continued rises of raw material prices may also adversely affect the payments positions of the more highly developed countries. The rise in import prices may mean a tendency to general price rises. As noted previously, much will depend upon the measures taken to avert the dangers of inflation.

International transfers abroad and capital movements from the United States and other countries will continue to affect the payments positions of other countries. Non-military U.S. aid may be expected to taper off, with, however, the possibility of substantial assistance to certain areas. To an unknown extent, this declining ECA and other non-military aid will be replaced by military assistance. U.S. and other private investment capital may be very cautious for some time to come. Speculative capital movements may continue to play some role. “Hot money” may flow into certain countries with disruptive effects upon the domestic economy. In other cases, there is the possibility of capital flight, in forms difficult to check by direct controls, constituting a drain on the country’s exchange reserves. Even current payments may be restricted in order to provide offsets to possible adverse capital movements.

Such uncertainties will have effects upon the degree and pace of relaxation possible under present circumstances. Yet it must be recalled that the financial impact of the new developments thus far has been strongly favorable to the payments positions of countries other than the United States. There is today an opportunity for countries to take advantage of the current situation to overcome the difficulties resulting from the use of restrictions. Considering all factors, balance of payments conditions for their reduction or removal are favorable. For many countries, restrictions on international trade and payments can be reduced with less danger and less cost than has been the case since the end of the war. At the same time, the need for the benefits of greater efficiency and productivity is greater than ever.

6. Other Impediments to Relaxation

In addition to the uncertainties affecting the future balance of payments and reserve positions of a number of countries, there are certain other, largely non-financial, impediments to achieving the purposes of the Fund. Important among such impediments is the protectionist aspect of restrictions which build up vested interests in protection from outside competition, interests which may seek to prevent the removal of restrictions even although they are no longer necessary for financial reasons. In addition, as relaxation of restrictions takes place, there is considerable likelihood that priority in relaxation will be given to imports of those commodities for which domestic substitutes are not available. In this way, the restrictions which remain may well be the ones with the greater protectionist elements. The removal of such restrictions protecting uneconomic industries may thus prove increasingly difficult, despite the improvement in a country’s financial position. Moreover, an inertia favorable to the maintenance of restrictions tends to be created after they have been in force for some time.

Two or more countries may maintain restrictive systems favoring each other. Initially, these may have had the purpose of assuring imports which could not otherwise be paid for and of increasing the level of trade. They may, however, continue as mutual discriminatory-protective devices beyond the existence of the conditions which gave rise to them. In this connection, restrictions may be maintained as bargaining weapons to secure concessions from other countries in bilateral negotiations. In a world increasingly characterized by scarcities, however, the need for restrictions to help obtain export markets is greatly reduced.

However difficult may be the removal of restrictions maintained for such purposes, all possible efforts should be made to remove restrictions which are unnecessary for financial reasons. Although in the past there may have been fears that unemployment would result if protection to domestic industries through restrictions were eliminated, present conditions are such that these restrictions could be eliminated with very little, if any, danger to the level of employment. Indeed, removal would tend to establish high-level domestic production on much firmer bases from the long-run point of view. Moreover, the efforts of many countries to increase imports seem to reflect the growing weight given to the desirability of importing as against such factors as protectionism in determining national policies. There is the possibility that countries will wish to retain and use restrictions as bargaining weapons to obtain desired or needed imports. Such need is greatly reduced as scarce or strategic materials are made subject to international allocation. Similarly, the very continuance of developmental projects may be threatened by shortages of essential imports. Through international action it may be possible to protect developmental projects on terms acceptable to both the developing country and the rest of the world.

Certain special problems sometimes arise in connection with multiple currency practices. In a number of countries such practices are intended to avoid or reduce the need for administrative controls. In addition, a number of these countries have a chronic problem of inflation. Multiple rates may be used to minimize the rise in the price of elements of the cost of living by giving more favorable rates to certain commodities. Also, their use frequently results in revenue to the national treasury. Multiple currency practices of this type have frequently tended to develop in countries where other revenue-raising devices have been incompletely developed. Yet the revenue from the exchange taxes may be important to the financing of what the country considers to be necessary expenditures and in the struggle against inflation engendering budget deficits. Under such circumstances, the difficulty of substituting alternative sources of governmental revenue and price policies may be an important impediment to the removal of restrictions. The Fund will continue to work with member countries faced by problems of this type and will attempt to help them overcome these difficulties.

Despite the general overcoming of the financial obstacles to the removal of restrictions, the Fund recognizes that there are a number of countries still experiencing basic or structural balance of payments difficulties limiting their ability at this time to make progress toward the removal of restrictions. The Fund will continue to consult with member countries faced by problems of this type as to finding ways of overcoming the sources of those difficulties.

Plans for economic development of certain member countries may create by themselves special aspects of this problem. Careful study will be required in each individual case as to the feasibility of overcoming the obstacles to the freedom of international trade and payments resulting from developmental programs. The Fund recognizes the importance and necessity of developmental programs. It believes that at least countries with relatively adequate reserves and strong balance of payments positions should be in a position to reduce their reliance on restrictions and, at the same time, to pursue more effectively their development programs. Relaxing restrictions may facilitate an improvement in the inflationary situation of the country; the fruits of development will be made more secure, and gains from development in some segments of the economy will not be offset by losses in others. It must be recognized, however, that some countries pursuing substantial development plans may not be in a sufficiently strong balance of payments position to permit them to dispense with the selective application of controls. The Fund will continue to consult and cooperate with such countries in working out appropriate policies for the long-run achievement of its objectives in the light of their particular situations.

* * *

In conclusion, despite the existing uncertainties and difficulties, the Fund believes that many countries are in a position to undertake substantial removal of discrimination and relaxation of non-discriminatory restrictions and to make significant progress toward convertibility. Such measures can make a substantial contribution to offsetting some of the inevitable consequences of rearmament programs. They could help strengthen the economies of the countries concerned and provide a sounder basis for the achievement of longer-run stability in external economic relations.

A U.S. import surplus is also reported for January 1951.

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