Discussion of Fund Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- October 1966
Statement by the Governor of the Fund and Bank for Jamaica—D. B. Sangster
Jamaica is very glad to open the proceedings in the plenary discussions in the 1966 Annual Meetings. I join with you, Mr. Chairman, Mr. Woods, and Mr. Schweitzer in expressing my thanks for the welcome extended to us yesterday by the distinguished Governor for the United States on behalf of his Government. I welcome two members of the Commonwealth, Singapore and Guyana, who have been admitted to membership of the Bank and Fund at this meeting. Last year I spoke briefly and extended my remarks: this year I am not able to do so but I hope to set the pattern for very short speeches.
As we have come to expect, Mr. Schweitzer and Mr. Woods have given masterly surveys of developments over the last year of those matters which come under their responsibility. …
Mr. Schweitzer’s survey was most lucid and penetrating, and as a small country we welcome the concern he has shown with the necessity of finding a solution to international monetary problems, taking into account both the views and the interests of the developing countries of the world.
Once again Jamaica must bring to attention the effect that high interest rates and shortages of capital prevailing in the world’s markets have on small underdeveloped countries. The Bank has itself complained that it has to pay high rates of interest for the funds which it borrows, but it seems to me that the Bank should not be satisfied with regarding itself as a victim of a particular situation nor should the Fund be content to see interest rates in the major money markets remain at their present high levels. This is a world problem affecting everyone, and surely we as Governors are conscious that one of the purposes of institutions such as the IBRD and the IMF must be to make some contribution toward the creation of a stable monetary climate which will give the richer countries the confidence which they evidently need to feel before they are both willing and able to promote a greater flow of capital from themselves to the developing countries at reasonable rates of interest.
Equally important, we in the developing countries who belong to these great institutions ought to be able to plan on the assumption that the more developed countries as a whole can make a steady, indeed an increasing, contribution in one way or another which will help us to bring the living standards of our people closer to that of the richer nations. No one can continue to borrow at an interest rate of 8 per cent or more for expenditure on education or agriculture or health services, so that, if we allow the present conditions to continue, we are really saying that the development of basic infrastructure must cease.
For countries like Jamaica which are unreasonably denied access to the resources of IDA, we are in double jeopardy because we are faced with two unpleasant alternatives, either not to spend loan funds on development at all (in which event we must face the inevitable social and political consequences), or, when we get it, use this money which, because of the high interest charges, will eventually destroy our financial stability and oblige us deliberately to restrict the growth of our economies. There are very few developed countries in the world today which, for one reason or another, have not put up barriers to the raising of development loans by other countries. We appreciate that they have very real problems but we do not think that these problems should be solved at the expense of the developing countries. Those large countries which are in balance of payments deficit say that until they cure their deficits they must restrict their new investments overseas; this we can, in some cases at least, understand. But then many of those in surplus often give the impression that their main aim in life is to go on accumulating surpluses, which raises the presumption that, when those countries now striving to eliminate their deficits succeed, they may be reluctant to pursue more liberal policies for fear of returning once more to deficit.
If an increase in international liquidity by the creation of some new form of reserve asset will get us out of this dilemma, Jamaica is wholeheartedly in favor of such an increase. At the meeting of Commonwealth Finance Ministers in Montreal, it was our view that there was an urgent and immediate need for contingency planning to provide additional liquidity; we also feel that the International Monetary Fund should play a major role both in formulation and execution of any plan so that all members could make their views known in any discussions having to do with monetary reforms. I need not emphasize also that any new reserve assets should be universally available on a uniform basis to all members of the Fund. And I am glad to note that Mr. Schweitzer in his opening address has put his great prestige behind this view. I know that other Commonwealth Finance Ministers will deal with these points at greater length, and I merely make the point that I fully support the views of my Commonwealth colleagues which were expressed in Montreal. I know that Governors for many other developing countries share these views. …
I hope that this meeting will be most productive and that it will see a resolution of the conflicting views which have beset international development and monetary problems in the past few years and will set the stage for continued progress in the months ahead.
May I, in closing, suggest to my colleagues that on their winter vacation next year they should stop over in Jamaica for a visit. We shall be very happy to see them.
Statement by the Governor of the Fund and Bank for Malaysia—Tan Siew Sin
We meet today in the capital of the richest and mightiest country in the world on an occasion which also marks 20 years of effort by the International Bank for Reconstruction and Development and the International Monetary Fund. It cannot be denied that during this period the “heavenly twins,” if I may use an affectionate though facetious expression which is sometimes used to describe these two sister organizations, have tried their best to improve the economic health and strength of the free world. They have poured hundreds of millions of dollars’ worth of aid, initially into a Europe devastated by the most destructive war in history and, thereafter, into the developing countries of the world. As everyone knows, a developing country is really a euphemism for a poor country, and as I prefer to confine myself to reality, I shall hereafter use the expression “poor country” instead of “developing country.” The Bank and Fund have done much for Europe. In fairness to all concerned, it should be added that Marshall aid also helped greatly. In any case, Europe not only recovered surprisingly rapidly but achieved levels of prosperity which far exceeded prewar levels.
What has been the impact so far of the efforts of the Bank and Fund on the poor countries of Asia and Africa? To take one typical instance, “the Latin American countries increased the volume of their exports of primary commodities by 25 per cent during 1956-62, but they earned less foreign exchange in 1962 than in 1956,” if I may quote the exact words of a World Bank official. I agree that this is only one example, but it is common knowledge that the same trends can be observed for all poor countries who export primary commodities. In fact, I think it is true to say that a sure way to remain poor in the modern world is to produce mainly primary commodities and import largely manufactured goods. This official also mentioned two factors which should be borne in mind: (1) Whereas the output of the rich countries is growing at a rate of $40 billion to $50 billion a year, the total flow of financial resources from government and private sources to the poor countries has remained almost unchanged since 1961 and amounts to about $9 billion annually; thus, the flow of financial resources to the developing countries is actually decreasing in comparative terms as the rich countries get richer. (2) More than one half of the foreign aid received by the poor countries from government sources (which is about $6 billion) flows back to the rich countries in the form of debt repayments and services and is not available, therefore, for development purposes.
I shall now give another example, and this time I shall take my own country, namely, Malaysia. We have been praised by many impartial observers of standing for not only being able to get along without much foreign aid but for being able to record significant rates of economic growth in spite of its lack. We have pursued prudent and conservative financial policies but liberal trade and economic policies. We have eschewed some of the more novel economic experiments indulged in by some of the poor countries in a desperate bid to overcome the neglect of centuries. As a result, we have one of the highest per capita incomes in Asia. We also enjoy one of the highest living standards in Asia. Our gross national product has increased by an average of 5.6 per cent during the last 5 years. But during the last 14 years, the cost of living index has remained stable. We are probably the only country in Asia and Africa in the postwar years which actually increased its foreign exchange reserves after independence. In spite of a vast development effort which has already lasted 6 years, our foreign exchange reserves are still equivalent to about ten months’ imports.
One has only to visit our country to be aware that our economy is expanding. There is the evidence of the eyes to go by, and one comes to this conclusion without having to be an economist and without the benefit of figures. In other words, Malaysia can be described as a model poor country. It is, however, rich by the standards of the other poor countries of Asia and Africa in the sense that a small shopkeeper is rich compared to an unskilled laborer. It is a matter of relativity and it can be demonstrated by a point which was made in a recent survey conducted by the United Nations Economic Commission for Asia and the Far East. Among other things, this survey showed that if Malaysia were to continue at its present rate of growth, it would take 58 years to reach the present Japanese income level and 125 years to achieve the present New Zealand per capita income. That, gentlemen, is the magnitude of our wealth when compared with the wealth of Japan and of New Zealand! If this is the picture for Malaysia, which is probably the richest of the poor, one can imagine what the picture is for the poorest of the poor!
I referred earlier in this statement to the dramatic economic recovery of Europe after the last war, but it should also be noted that this recovery might not have been possible with the help of the Bank and Fund alone. There was Marshall aid to boot, and this was not only substantial, it was on much easier terms. How much more necessary then that we should have the equivalent of a Marshall Plan for Asia and Africa which has to start from a much less advanced base. There is a vast difference between a Europe which, though devastated by war, had, at least, an adequate reservoir of technical and managerial skills and a highly industrialized base compared to an Asia and Africa, which lack all or nearly all prerequisites of rapid development.
We, therefore, suggest that a basic reappraisal should be made of present attitudes and present policies. It is clear that aid, i.e., foreign economic aid, is not an end in itself. It is a means to an end. The end must obviously be to assist the recipient countries to reach that stage of self-sustaining growth when it can not only help itself but would eventually be in a position to help others as well. Mr. Escott Reid, who is a noted Canadian diplomat, writer, economist, and university professor, has revealed that “the net official flow of long-term capital from the rich members of the World Bank to the poor members is now about $6,000 million a year, or less than
In other words, this increase is still within the means of these rich countries, and it is not exactly charity because even this increased aid would only partially offset the foreign exchange earnings lost to the poor countries as the result of a pricing system for primary commodities which forces countries producing them to produce more in order to earn less. It is not exactly based on equity because these poor countries get less and less for each unit of production which they sell while they themselves have to pay more and more for each unit of manufactured goods which they buy from the rich countries. I think it is probably true to say that if prices of primary commodities were to increase at the same rate as the prices of manufactured goods, the poor countries might not need any economic aid from the rich countries or even from the Bank and Fund because the difference between what we get now and what we would get if we were paid fair prices for primary commodities would be greater than what we are receiving in the form of aid. …
Last but by no means least, the Bank and Fund should provide more technical assistance and expertise which can sometimes be more important than money. Quite often such assistance and expertise can go a long way toward preventing that misuse of aid which the rich countries fear and which, we in the developing countries must admit, does sometimes occur in spite of our best intentions.
If I may say so, the essential requirement is to keep hope alive. Even the most optimistic among us cannot but feel depressed if we look merely at the figures. If, therefore, hope is not kept alive, the poor countries might feel that they have no choice but to turn to the only other alternative open to them, i.e., totalitarian rule, though this would be known by different names in different countries. Those of us in the free world who feel that man does not live by bread alone could see to it that this philosophy need not be an idea; it is an idea which can be turned into reality, if the will is there. The material resources are certainly available.
Statement by the Governor of the Bank for Ghana—A. A. Afrifa
I represent a Government that took over from the previous regime in Ghana only a few months ago. I am sure that most of my colleagues are already aware of the economic problems that we inherited, and I wish, therefore, to make only brief remarks about the progress we have made in our efforts at recovery.
The recovery of international confidence in Ghana that has occurred in recent months owes a great deal, on the one hand, to the facilities which the Fund has made available to us, and on the other, to the assistance and support which Ghana under the new Government has received in a very generous measure from her friends in the United States of America, Germany, Canada, and the United Kingdom. In May the Fund agreed to a stand-by arrangement for one year whereby we can purchase the equivalent of $36.4 million. The Fund has also used its good offices in arranging negotiations between Ghana and its principal creditor countries to reschedule the repayment and servicing of our debts on suppliers’ credits. While the negotiations are in progress, there has been a temporary suspension of payment on medium-term and long-term credits. With the help of drawings under the stand-by arrangements and the resources freed by this temporary suspension, the current foreign exchange position has been brought more under control. Thus, since June 1 of this year we have been able to meet all current import bills at maturity as well as certain essential service payments, and last month a start was made with paying off the accumulated arrears on short-term debts under a systematic and nondiscriminatory arrangement which we have reached with all our short-term creditors.
There is thus a temporary respite in our payment crisis, but no one is more conscious than ourselves that all we have achieved so far is merely that we have gained vital time in which to apply the measures for putting our house in order. We are determined to turn this to good advantage, and have already made a start with a bold program aimed at stabilizing the economy and reforming its finances. This program has many facets, but its central feature is the budget introduced two months ago by the Chairman of the National Liberation Council. The main emphasis was placed on reducing government expenditure rather than increasing taxation, which is already very high. We have made a cut of more than one quarter in development expenditure, compared with 1965, and have also reduced recurrent expenditure to the minimum possible. This retrenchment cannot go without some temporary unemployment, which has indeed already emerged as a serious problem. We have plans, however, for undertaking selective labor-intensive programs to contain the problem.
We believe, however, that the burden of our stabilization efforts could be greatly lessened if the problem of fluctuating commodity prices were solved. It was therefore a disappointment to us when the Cocoa Conference in New York failed to reach agreement on price stabilization.
Turning now to the wider issues before us, I shall make references to both the International Monetary Fund and the World Bank Group in this statement.
Few subjects dominate the international monetary scene today more than the discussions that have been going on among the Group of Ten GAB countries in an effort to examine, anticipate, and take steps to avoid the shortage that is already foreseen in international liquidity. At the time of the Annual Meetings last year the Group of Ten had been considering this important matter for two years or more, but it was still not clear then whether and at what stage the Group intended to bring the International Monetary Fund into the discussions so that all our member countries might participate in the discourse.
Mr. Chairman, you will recall that deliberations on this subject at our last Annual Meetings stressed the need for these discussions to be brought within the machinery of the International Monetary Fund. It is gratifying, therefore, to note from the Fund’s Annual Report and from the Managing Director’s statement that over the past year the Fund has been associated in a constructive way with the significant advances in understanding and agreement that have been reached on the need, on the one hand, to reform the international monetary system with a view to making it more responsive to the needs of both industrialized and developing countries and, on the other, to make provision for a deliberate creation of international liquidity in the future by planning now on a contingency basis so that there is a ready-made scheme to put into operation when the need occurs. The consensus reached by the Group of Ten on the basic principles that all members of the Fund should participate without discrimination in the distribution of newly created reserves, using Fund quotas for a guide, represents a significant advance toward meeting the interests of countries outside the Group, and we may congratulate both the Fund and the Group of Ten countries for this.
It seems, however, that although there is wide agreement among the Deputies of the Group of Ten countries on the broad principle of universal approach to international liquidity, namely, in the reserve creation, distribution, and decision-making process, a number of major industrialized countries are still reluctant to accept fully this universal approach. And in a recent communiqué issued by the Finance Ministers of the European Economic Community at the end of their Luxembourg talks, stress is laid in paragraph 4 on the special responsibility of the main industrial countries and the unique problem of the developing countries in a way that detracts from the principle of universality.
As representatives of a developing country, my Delegation would like to stress and concur in the principle already proposed by the Fund that reserve creation is the concern of all member countries. Consequently, we should all be recognized as having an abundant interest in ensuring that any arrangements for the creation of additional international reserves are such as would satisfy the proper requirements of all countries without discrimination. This principle, in turn, demands that all member countries should have the opportunity through their duly accredited Executive Directors and also at the meetings of Governors to participate in any decisions which lead to the creation of new reserves. I am thus of the view that the International Monetary Fund, which serves all of us so well, should be allowed to play a key role in any new arrangements.
I am sure that the Group of Ten countries are not looking for any commendation for their good initiative in this matter, but we must not overlook the special merit in the genuine efforts which their Deputies have been making to ensure that there is a broad approach to this vital question. The Managing Director of the Fund was reassuring in expressing the hope that it may be possible during the course of the year to reach agreement on the details of a contingency plan which we could then consider at the 1967 Annual Meeting. My Delegation supports the sense of urgency with which he is handling this matter and hopes that the steps which he is taking in this direction are fruitful.
The improvements that were made in the compensatory financing facility will undoubtedly benefit a large number of member countries, and are further demonstration of the Fund’s flexibility and constant search for ways in which it can best meet the needs of its members as fully as possible. …
During the year both the Fund and the Bank have been extremely generous in affording technical assistance to Ghana, and I should like to be allowed this opportunity of placing on record how much we have enjoyed meeting and working with the staff members of the Fund and the Bank on the various missions that have visited us.
Finally, we are happy to note the tremendous progress and growth that has taken place in the Fund and the Bank during the past 20 years. That operations in the past year followed this trend is amply proved by the analysis presented in the Annual Reports of these institutions. For this, v/e congratulate the Managing Director of the IMF and the President of the IBRD and its affiliates, as well as the staff, and wish them more years of yet more successful operations.
Statement by the Governor of the Fund and Bank for Canada—Mitchell Sharp
We listened yesterday to three noteworthy speeches. I was particularly struck by them because they expressed so eloquently some of my concerns as a Minister of Finance. …
I find myself in full agreement with the emphasis which has been placed by Mr. Schweitzer on the necessity of an appropriate mix of policies if we are to succeed at the one time in containing the inflationary price pressures and achieving a satisfactory adjustment of international payments. He has stressed the need for an adequate use of fiscal policy and the avoidance of excessive reliance on monetary policy. This has been widely recognized by many countries, including my own. …
The third problem that I would like to touch upon this morning is the problem of international liquidity. The task here is to devise and put into place adequate machinery for the deliberate and rational creation and management of international reserve assets.
Important progress toward achieving suitable arrangements has been made in the past year, but the rate of advance has been disappointing, and we think it most important that substantial further progress be made in the year ahead. In that connection we welcome the continuing intensive work by both the Fund and the Deputies of the Group of Ten, and we also welcome the proposals for informal meetings, between the Fund’s Executive Directors and the Group of Ten Deputies.
We believe that there is a large measure of agreement around the world about many of the principal characteristics of good arrangements for the management of international liquidity. I speak with greater confidence in this respect, by virtue of the fact that it was my privilege last week to act as chairman of a meeting in Montreal of Commonwealth Finance Ministers at which the views on this subject of the 23 countries represented were exchanged. I cannot, of course, speak for anyone but myself, but I have the impression that there is a wide measure of agreement within the Commonwealth, and I think also outside, on a few salient points. The first of these is that the new arrangements should be very closely associated with the International Monetary Fund. The second is that, since the need for adequate growth of reserves over time is universal, the arrangements should provide for the direct participation of all countries. The arrangements must, of course, commend themselves to the world’s principal trading countries, because as a practical matter any scheme would be unworkable without their support.
There are of course technical difficulties to be resolved, but I share the view of the Managing Director of the Fund that these difficulties can be overcome in a reasonably short time if the will to do so is present. It is vitally important to make rapid progress because I believe, with the Managing Director, that “world confidence [in the international monetary system] will be greatly strengthened once it becomes established that the members of the Fund have agreed on a system of deliberate reserve creation intended to ensure that reserves increase by such amounts as are judged necessary for the full, free, and noninflationary growth of the world economy.”
Canada is prepared to join in a determined and cooperative approach to this problem.
Statement by the Governor of the Bank for Yugoslavia—Kiro Gligorov
I take particular pleasure in availing myself of the opportunity to participate in this year’s Annual Meetings of the International Monetary Fund and the World Bank and its affiliates. The World Bank and the Fund this year are celebrating 20 years of their work, and this occasion—with our congratulations—should not pass unnoticed. The results so far achieved by these institutions prove the usefulness and positive effect of international organizations whose task and aim is to strengthen international cooperation in finding adequate solutions for concrete questions of wider interest. …
The Annual Report of the Fund before us has been supplemented this year by new features and gives a concise review of world economic and monetary developments in the past year. The opening remarks of the Managing Director, Mr. Schweitzer, have offered us a more detailed inside look at these world developments. I am especially glad to note that it is evident from the speech of Mr. Schweitzer that the Fund has taken a decision on further improvements in the existing system of compensatory financing. I hope this liberalization of the system of compensatory financing will be more efficiently applied in the future than in the past in rendering assistance to countries which find themselves in balance of payments difficulties as a consequence of adverse movements in their export earnings.
In his statement Mr. Schweitzer has also underlined with great competence the importance of seeking schemes for the maintenance of international liquidity on a level which would not endanger the smooth development and further growth of world trade.
In this connection I wish to stress that, in my opinion, the question of the reform of the international monetary system with respect to the maintenance of international liquidity has not in the past year lost its urgency. Even the statement that the present level of liquidity is satisfactory does not lessen the urgency of the problem. On the contrary, I am of the opinion that this problem becomes more and more acute and that it was useful that the Fund actively participated in the discussions held in the past year before various forums. These problems are of prime importance for the future work of the Fund and as such are also of essential importance for all member countries. It seems to me that this question is of such universal character that it is of interest to the whole world community. This leads us to the conclusion that solutions must be sought on a universal basis. In saying that, I do not want to diminish the importance, nor the interest, nor the responsibility of the developed, industrial, reserve currency countries. The true solution to this problem may be found only in the direct participation of all countries on a broad basis of cooperation and international understanding. For this reason, any creation of additional reserves and their distribution should be made accessible to all on the basis of certain objective criteria. I therefore believe that the work on the problems of international liquidity should be intensively continued within the framework of the Fund, and that its action be coordinated with the actions of other bodies, especially the work of UNCTAD and its organs. I do believe that an agreement could be reached soon in respect to the procedure for an approach to the solution of this question in the light of the above-stated principles. We should not allow development in the field of international liquidity to become a disappointment to us, and I believe the Fund will see to it that this will not happen.
Simultaneously with the changed structure of the membership of the Fund, general concepts have also greatly changed in many monetary developments in the world. It is a fact which imposes the necessity for a quick adjustment of the policy and practices of the Fund to such world developments. This is especially true since the resources of the International Monetary Fund are the most effective support for its member countries, implementing programs of internal stabilization of their economies. It seems to me that this necessity imposes introduction of certain improvements in the Fund policy for the utilization of resources. Such improvements should find a place within the general action for rendering support to that part of the world which is making efforts to bring the development of its economies to a higher level under stable conditions.
What has been said above is also closely connected with the question of a closer cooperation between the Fund and the Bank in respect to countries undertaking extensive stabilization programs. All efforts now being made to promote such cooperation are welcome. This cooperation would be even more fruitful if a formula could be found for actions in common with those countries that are making efforts to stabilize their economies and to adjust their monetary systems to the policy and principles of the Fund. This movement does not mean any deviation from existing basic principles, but only an adjustment of the specific policies of the Bank and the Fund to the necessities of these countries. The experience gained by my country in the implementation of the economic reform now under way offers the best proof of what I have said. I must point out that the Fund’s participation and support in this action is of great importance, and my Government greatly appreciates this.
Statement by the Governor of the Bank for France—Michel Debré
The science of economics has in recent years made remarkable progress, which may be compared with that realized by medical science, although the latter is a long way ahead. After men of genius have observed with new understanding natural phenomena either of the human or of the social body, we are witnessing today, both in medical science and in the science of economics, an intense effort of reflection by a very large number of minds. The means now available to high officials of state, particularly Ministers of Finance, those practitioners of economics, and the Governors of central banks, those most excellent physicians, are becoming more valuable year by year. The level of knowledge which we have reached does not now allow those bearing responsibility to act purely in accordance with their own intuition or emotions.
This preliminary remark will explain the sequence of the observations that I have the great honor to make to this meeting. In this year 1966 we may indeed consider that the international monetary system, the subject of our preoccupations, has become a matter for very serious concern. Under the same title of experts, genuine physicians and unlicensed amateurs are crowding at its bedside, while we, who are responsible for the economic health of our countries, question ourselves.
Confronted with this sickness of the international monetary system, let us first try to diagnose the complaint. And then, as a second stage, let us try to establish a therapy, fully aware that it is always easier to discern the symptoms than to prescribe the remedy. A realization of the cause of a trouble may at least enable us to say what ought not to be done.
I shall speak with a frankness which may hurt some of you. If I had ever doubted such a frankness to be opportune, that doubt disappeared when I once again sighted the shores of America.
As we touch land in the United States we repeat the action of millions of human beings who have found freedom in this country and who have demonstrated to the world, for themselves and their children, that it is possible to achieve the highest degree of prosperity and might while observing the fundamental rights of mankind. Such a deep feeling of admiration, and our gratitude for the efforts which saved humanity from direst calamity in World War II, give us the assurance of being understood, even if the analysis of facts or judgments involve me in some criticism.
It seems to me that a diagnosis may be reached by considering the following three established facts:
To begin with, the time is past when certain national currencies could be used as an international reserve instrument, and it is failure to realize this fact that causes the monetary confusion to persist.
Secondly, our international system is not at present suffering from a shortage of money, but is rather in danger of a surplus, that is to say that any immediate increase in liquidity (to use the fashionable term) will aggravate our disease.
Finally, the solution to the serious economic and even political problem of the unequal development of the countries already industrialized and those in process of industrialization cannot be found only by monetary means.
I would like to return to each one of these three points.
1. The gold exchange standard no longer answers to the needs of the international community.
Starting from a form of gold exchange standard which was intended for a short time, owing to circumstances, we are now moving toward a notion of world reserve currencies which some are trying to substitute permanently for gold. The prominence given to these world reserve currencies is aggravated by the fact that, through a probably unavoidable process, one national currency tends to become the exclusive reserve asset.
In normal times, times which we would wish to be characterized by a continuing effort for better relations between free and independent nations, the evolution I have described is pernicious. Obviously a national monetary policy cannot be guided, as it always should be, by the prior consideration of international equilibria. National interests cannot help but predominate.
Are we, anyway, on the gold exchange standard? Owing to the privileged position which certain reserve currencies have reached, one of them in particular, the system is no longer working according to its definition. For instance, to convert surpluses into gold is considered, by some curious mental aberration, as a dangerous, indeed as an inadmissible action, whereas this is one of the principles of the gold exchange standard in its normal functioning. Conversions into gold have the advantage of ensuring that unlimited credit is not granted to deficit countries. At the same time they act as a danger signal without giving rise, if well planned, to any abnormal shrinkage of the volume of international liquidity.
We must thus not be afraid to recognize that the first defect of our present monetary system is caused by the abuse of certain national currencies as world reserve assets, or, to speak with a frankness justified by honest observations of the facts, of a single currency, the U.S. dollar, which seeks to replace gold.
The very great power and the expanding use which support this elect currency explain this evolution. All the same, let us repeat that at one time, by reason of serious circumstances which disturbed many things besides our economy, the gold exchange standard, that is to say, the prominence of the dollar, was timely and justified. But times have changed and so has the system. It is no criticism of anybody, or it could be criticism of everybody, to assert that a currency is above all the expression of confidence in an exchange instrument.
If the whole world were under the tutelage of one political authority, which would be universally obeyed and bring to all the benefits of a balanced expansion of production and trade, we might imagine that a monetary symbol, representing the power of such an authority and the confidence placed in it by the majority of mankind, would be the expression of an international reserve currency. But it is not so. To be sure, there are and always will be close relationships of solidarity which allow the determination of a monetary policy common to several nations. It is a fact of experience that this solidarity works easily within a limited area where traditional and sentimental ties are allied to economic relations. But such a solidarity cannot cover the whole world. This is the reason why the gold exchange standard loses its value when an attempt is made to bring it systematically to the level of a world-wide rule, to the benefit of a single currency. It must appear as inequitable since it has no reciprocity. Reserve currency countries may acquire the currencies of the others, but the reverse is not true. The gold exchange standard seems to be dangerous since there is no corrective mechanism to offset the deficits of the reserve currency countries, and these countries are therefore able to pursue a certain policy without having their attention called to the causes of the trouble of which the system itself is the origin.
Finally, the stability of the international monetary system is impaired because, beyond a certain limit, accumulation of the reserve currency undermines confidence in that currency.
This analysis is the result of findings stated with precision in the reports of experts. One of the main causes of the present troubles is the persistent deficit in the U.S. balance of payments. The exceptional monetary function given to this deficit erroneously furthers its conservation. The incessant issue of reserve dollars provokes an excessive creation of money all over the world while also permitting an unlimited outflow of capital. This state of things is the cause of a world-wide inflationary trend which casts a growing shadow on the future.
2. The international community is not suffering at this time from a shortage of monetary liquidity.
The opposite view is readily expressed, and the shortage of reserve assets as well as, by implication, the shortage of gold are cited to justify, by a distortion of the present system, the creation of additional international liquidity.
Is there really a shortage? And is this really the trouble affecting our monetary system? We owe it to ourselves to make a serious investigation.
May I recall that in 1964 the financial leaders of the main countries agreed that the volume of liquidity had reached a level said to be “fully sufficient for the time being and even for the immediate future”? This liquidity, on whatever basis it is calculated, increased during the past year by the substantial figure of over one billion dollars. And I do not mention the new formulas by which more than a billion dollars are created overnight—a contradiction, if ever there were one, of all the allegations to the effect that it would be difficult to create additional liquidity!
If we consider the evolution of the monetary gold stock, the importance of the currency assets, and the increase in the resources of the International Monetary Fund, we may be assured that today, as well as previously, the volume of international liquidity does not now and should not in the near future act as a brake on the development of production and trade. On the contrary, it is the overabundance of liquidity that is the problem.
In France we have learned from our own experience in the last 50 years, and by observation of similar and even more severe events affecting the economy of neighboring countries, what a tragedy inflation is. We should not believe that what is true for the economy of a country is wrong for the international economy. In the past it was inside the borders of a country that inflation, when it became more rapid, stirred up economic and social troubles as well as political disasters. The same things may happen at world level and the symptoms we have observed in the last months are in my opinion revealing enough. The material facts are reinforced by psychological ones, such as the hesitancy of holders of reserve currency to continue the immoderate growth of their foreign exchange assets.
Under such conditions, is it really conceivable that the creation of an artificial reserve asset designed to augment the amount of liquidity would be a cure for our illness?
I study the works of the greatest experts; I read the reflections of the most eminent scientists; and the least I can say is that these works and reflections show not only that there is no urgency, but that it would be dangerous, through too hastily conducted studies, to let people believe that any useful purpose would be served by a method so far from the right solution.
I have heard of paper-gold, and this expression, which is not new but always appeals to the imagination, would have the effect—let us dare to admit it honestly to ourselves—of delaying the return to equilibrium of the balance of payments in the reserve currency countries, thus aggravating the threat of world-wide inflation. Instead of drawing closer to rehabilitation and cure we would plunge deeper into illness. Should we continue up to the point where we would be obliged to surrender the patient to the hands of surgeons, when this deplorable outcome could be avoided?
3. The present monetary disorder: its deterioration through the creation of artificial liquidity in no way facilitates world industrial growth.
An argument is now put forward, and it is so weighty as to cause some hesitation. We are told: you may be right, it may be true that the community of nations does not suffer from an excess of liquidity. However, liquidity is unevenly distributed and since the first political obligation of the world of today is to develop less advanced countries, the best, if not the only means, is to create additional liquidity through a reserve currency.
This argument merits our attention, not only because in this meeting the IMF and IBRD policymakers are sitting side by side but also, and chiefly, because the problem of the growth of a part of the world requires our constant concern: economics must yield to the needs of politics. The question is whether by providing additional liquidity we would be acting properly.
The countries which started their economic modernization only recently are suffering from a lack of capital. Their production and therefore their sales are limited to some agricultural products and a few raw materials. The prices they can obtain for their exports are not always satisfactory and, furthermore, they are not stable. Therefore, these countries are losing their chances of progressing within a reasonable length of time.
The industrialized countries, and primarily those which have reached a high standard of living, ought to channel part of their acquired riches, present production, and future efforts into the development of the less advanced countries. Is it really through the creation of additional liquidities that we can reach this goal? We have to be serious on this important issue.
First of all, we must realize that there is no miracle cure capable of providing international money unless someone is willing to pay for it. It is even dangerous to give credence to the feeling that economic aid could be granted to some countries without its charge having to be borne by others. The assumption that supplementary liquidity would easily assist an aid policy has this first illusion behind it. As far as the developing countries are concerned another illusion is created, but not a better one. Money is not an artificial creation. Capital is not born of nothing. Money means production. By relying on the distribution of artificially created monetary liquidity to improve production and to promote exports a momentary sort of false ecstasy may be experienced, but without any other discipline there is no remedy for the real difficulties. On the contrary, poverty will be greater after this illusion than it was before.
Assistance to developing nations results from serious action, consistent both with the needs of each of them and with the rules that determine the expansion of international economy. I shall have occasion to come back to this but I wanted in this first part of my statement, dealing with an analysis of the facts, to reject a thesis invented to fit the case, and I can do so with greater force on account of the fact that France is first among industrialized nations as regards the size of its per capita contribution to developing nations.
Such are the facts. For our future action, let us now remember the rules of conduct afforded us by both experience and reasoning. Respect for fundamental equilibria, acknowledgment of the role of gold as an international currency: we must not try to evade these two truths. We may then usefully work for economic and monetary cooperation.
Respect for Fundamental Equilibria
The lessons of experience have taught us, and teach us every day, that the economic policy of a modern country is based upon an effort to preserve the fundamental equilibria: working population and job opportunities, savings and investment, prices and wages, national production and money supply, balance of government finances, of external trade, and of capital movements. These equilibria require discipline and vigilance. They continuously need adjustments because the evolution of the economy, the activities or the turmoil of social life, constantly bring about sudden changes. But we know that the right way is the one which allows us to exert a constant effort, by which steady economic growth, a progressive improvement of the standard of living, and a national advancement toward progress and independence may be assured.
No country can permanently ignore such internal rules, which make possible the equilibrium of external payments. Even countries at the peak of civilization and development cannot, while neglecting external deficit, maintain autonomous monetary policy within. France speaks from experience in this field and it is perhaps because she has suffered grievously from wrong policies that I can speak to you in this way.
In this connection, I want to stress the value of the endeavors undertaken by the OECD to promote balance of payments and adjustment processes. Those endeavors are still cautious, but they are made in the right direction. The economic activity of the international community results from the adjustment of the mechanisms commanded by national economies.
The Central Role of Gold as an International Currency
The value of an international money first comes from its ability to assure that these mechanisms function correctly. If the world has known only one genuine international money, it is because the world is what it is, divided into nations—each with its own political command and the confidence that men and women have in that command. That is why nothing but an instrument independent of national powers can regulate the balance of trade.
Gold has been and still remains this international instrument, even in the part of the world not represented here, where one might have supposed that a strong ideological solidarity and nationalization of the means of production would have banished it from the scene.
So gold really is an objective reality, to be discussed without superstition.
Gold is a raw material whose price, unchanged since 1934, has hitherto been confirmed by supply and demand on a market encompassing the entire planet. It is the only truly international liquidity, for its issue is determined neither by the wish of one or more countries nor by balance of payments deficits. It is certainly not created by the will of man or of a nation; it comes from rare and widely dispersed deposits, none of which, incidentally, is located in France. Production increases yearly, slowly but steadily, the existing monetary stock. Hoarding, despite its drawbacks, expresses all over the world an instinctive trust in the only monetary asset having intrinsic value.
Thus, age-old experience, founded upon human trust, has proven through thousands of vicissitudes the permanent value of gold as an exchange and reserve instrument.
This conclusion is challenged. Cannot we nowadays visualize some other device to escape from the consequences of a system based upon a raw material? It is true that the recent evolution of the world has made it possible to perfect credit techniques which give international relations necessary flexibility and which allow nations, in spite of their diversity, to evidence ties of solidarity.
This is why, provided that gold is retained as the fundamental basis, as was agreed at Bretton Woods, the Monetary Fund, by means of credits in convertible currencies and in reasonable amounts, is able to deal on a multilateral basis with the particular situations it has to confront. But to be sound, any credit must be of a temporary nature, that is to say, result in repayment.
Could this situation ever change?
As we become more knowledgeable, we must remember to maintain a very modest attitude regarding man’s ability to master his destiny. To manage a world-wide currency, on an impartial basis, that is to say a basis acceptable to all; to provide for each and every nation—according to its production, labor, and its technical capacity—the correct amount of money; all that is in the realm of theory. Who can imagine or believe in an authority sufficiently respected to create and manage monetary liquidity, through daily, uncontested decisions, then, according to an interest unanimously acknowledged as the general interest, to regulate the circulation and holding of these additional assets which would furthermore have to coexist with other reserve instruments?
Behind this dream there are concrete ideas which revolve around private interests and also around an illusion. The creation of any kind of monetary instrument is not an academic exercise, but a political action, about which we know, from too-frequent experience and which is again menacing us, that it may very well rapidly lead to inflation, unless we conceive of a lasting union of wisdom and dictatorship. But wisdom is rare and dictatorship is unbearable.
Let us admit this conclusion: realize that no international monetary system can be based on anything but gold, supplemented by the operations of an international monetary fund adapted to its role of solidarity.
Methods of Cooperation
This “world solidarity” is of capital importance since it inspires, in our particular field, those indispensable complements, economic cooperation and monetary cooperation.
What can we say of economic cooperation that has not already been said?
It includes, first, financial assistance directly arranged between one nation and another, by a group of nations, or by the World Bank. This is an institution with favorable prospects. No doubt it will have to correct certain imperfections, especially it will have, in the distribution of its activities, to treat Africa—all of Africa—as being of greater importance. The importance of the monetary problem is the reason why, in this speech, I am not dwelling further on the role of the World Bank; its past, however, merits our hailing its future with confidence.
Budgetary aid is a supplement. Distributed, as it is, by one government to another or through organizations such as the International Development Association, its prospects are limited because of the burden they entail for the donor countries. International inflation or political pressures set upon it new and severe limits. This means that budgetary aid will be that much larger if the monetary system is more stable and peace better assured.
There is also a third form of aid which, as you know, is looked upon favorably by the French Government. Since financial assistance is limited in time, since budgetary assistance is limited by the burdens it imposes, and also since cooperation will be all the more fruitful if it is based on the potentials of each developing country and of its own endeavors, the path of progress lies, it seems to me, in the regularization of trade, particularly in agricultural products or raw materials, whose sales on international markets provide the main revenue of part of the world. This idea is slowly making headway. It is true that the mere fact of stabilizing the prices of primary products entails great difficulties, the first of which is the risk of overproduction, which involves a complicated quota system. Still, this road is the right one. Through reciprocal interaction of discipline in the field of production for some, and discipline in the purchasing field for others, international financial mechanisms may allow for economic cooperation, which is the economic expression of a true international solidarity. France, keeping faith with its traditions—which, as I just now recalled, place it in the first rank of cooperating nations—is prepared to open negotiations on the widest basis. Our country is hoping for such negotiations and has already made preparations for them by studies which could provide the basis for a discussion too long delayed.
Monetary cooperation is a special form of economic cooperation, but it can exert a lasting influence not only on the economy but also on policy by establishing close links between nations.
In difficult times, France had recourse to monetary cooperation, especially to the form of cooperation sponsored by the International Monetary Fund. In the brighter days France is enjoying at present, our country remains loyal to this form of solidarity. In recent years it has brought a very substantial amount of reserves to the Fund; its reserve position amounts to roughly $1 billion; and so, after Germany, my country is the Fund’s largest contributor. We have also participated in the Paris agreements known as the General Arrangements to Borrow—which already, on two occasions, have provided the Fund with the supplementary resources it needed. Finally, we consented to participate in the general quota increase, in spite of the methods for mitigation which seemed, and still seem to us, open to criticism.
Our experience, the assistance we have asked for in difficult times, the hardships we have suffered, the efforts we have undertaken and which we are continuing to make, in addition to our contribution to the Monetary Fund, enable us to repeat that there is no cooperation if economic, financial, and monetary disciplines are not sincerely accepted.
An objective survey of the facts, a disinterested review of principles which have been proven right: this was my only aim in speaking to you in the name of my Government. Some will no doubt challenge my conclusions, beginning with the one I strongly formulated and according to which, under the threat of international inflation, the idea of creating additional monetary liquidities is precisely what ought not to be done, because this so-called remedy may well pave the way to further deterioration.
We would be at fault in deluding ourselves that we could remedy the existing situation without first having searched conscientiously for the origin of the illness.
I shall say no more. The French Government has never ceased to collaborate, in word and deed, in any political effort aimed at rehabilitation. It will continue this effort, trying never to yield to illusions and disregarding criticism unjustified by reason or by the common interest.
When the clouds begin to disperse, it will be realized that the range of reasonable solutions is narrow. Truth, the basis of ethics, and solidarity, the basis of politics, are natural allies provided that a constant effort at seriousness and hard work is accepted; for without seriousness and without work is the progress of nations conceivable?
Statement by the Governor of the Fund and Bank for Japan—Takeo Fukuda
It is an honor to attend the Annual Meetings of this year and to meet with you once again here in this hall. Indeed, the Annual Meetings play a significant role as milestones of progress and development in international finance. I wish to express my profound admiration and tribute for the excellent Annual Reports made to us by the Fund and by the World Bank Group, and for the masterly statements made at the beginning of this meeting by Mr. Schweitzer, Managing Director of the Fund, and by Mr. Woods, President of the World Bank Group.
The Annual Report of the Fund points out that, for the first time in the postwar period, virtually all the industrial countries have enjoyed simultaneously high levels of employment during the past year, that containment of cost and price pressures has become their common problem, and that the United States is now in a position to be able to assign a higher priority than in the past many years to the objective of external equilibrium without undue sacrifice of domestic policy objectives. Our attention is also drawn to the world-wide upsurge of interest rates and the restrictive trend of international capital movements. It cannot be denied that there is increasingly a tightening up of conditions in the international money and capital markets. Frankly, I must say that the international economy now faces a rather delicate and difficult phase. If economies of the world should ever be poorly managed, there would develop a tendency detrimental to the balanced growth of the world economy and to a free and multilateral system of trade and payments. In order to prevent this, it is of increasing necessity that each country should, from a broad standpoint, intensify its cooperation with others in a spirit of mutual trust in the common interest of prosperity for the world as a whole. One of the outstanding features in postwar international finance has been the greatly enhanced willingness on the part of governments to consult with each other about the external impact of their economic policies. I believe that today is the time when the necessity of international cooperation is most keenly felt and mutual trust in consultations is most strongly required.
At the Annual Meetings of last year I stated that a recessionary mood continued to prevail in the Japanese economy and that I had been endeavoring to stimulate demand by fiscal and monetary measures in order to lift the economy out of the recession. It is my great pleasure to be able to inform you today that our economy has been making steady recovery since about the end of last year. As the recent recession was deep-seated and different in nature from several others we experienced in the postwar period, I believed monetary policy alone could not be depended upon to revive business activity. Positive fiscal measures were therefore adopted. Our balance of payments marked a large surplus on trade account in the past year due to a remarkable increase in exports accompanied by only a moderate rise in imports. Part of this surplus was absorbed by the deficit in invisible trade, but the current account remained in surplus by about a billion dollars. The substantial portion of this surplus was, however, offset by a deficit in the capital account and our official reserves barely showed an increase.
We aim to continue to promote a long-run stable growth of the Japanese economy by making full and proper use of fiscal as well as monetary policies. I wish to stress that we realize the maintenance of external and internal equilibrium will be an important problem for us in attaining this aim.
The Annual Report has made a lucid and penetrating analysis of the problem of international liquidity. My special attention was drawn to the fact that the increase in world liquidity during 1965 was only about half the annual average for the last decade, that most of that increase was accounted for by Fund transactions, and that the increase of gold in official reserves amounted to only $250 million.
The Ministers and Governors of the Group of Ten have reached a consensus on a number of basic principles and elements on the creation of new reserve assets, and have thought it appropriate to look for a wider framework in which to consider questions affecting the world economy as a whole. My country welcomes particularly the recognition that all countries have a legitimate interest in the adequacy of international reserves as well as the agreement that deliberately created reserve assets, as and when needed, should be distributed to all members of the Fund on the basis of IMF quotas or some similar, objective criteria. The establishment of a sound and reliable international monetary system is indeed a matter of common and direct concern of all IMF member countries.
The experience of 1965, which I mentioned earlier, might be interpreted as indicating a process in which the formation of international reserves is gradually coming to fall short of the increases annually required. Therefore, I should like to stress a point which I stated here last year. The problem of international liquidity should be approached from the viewpoint of giving confidence to the world by the provision of adequate reserves to assure future expansion of the world economy. However, I think it would be a matter of great regret if the absence of a clear picture about the future concerning international liquidity should produce unnecessary lack of confidence and anxiety with regard to the present international monetary system and lead various countries to timid management of their economic policies and to drifting toward protectionism and restrictions. In this sense, I think it has become more urgent than before for countries concerned to have a clearer picture about the prospects for the international monetary system by establishing a concrete contingency plan for the creation of reserve assets. It is my sincere hope that with the help of each country’s wisdom and international cooperation we will be able to discuss a specific contingency plan at the next Annual Meetings.
The deliberate creation of new reserve assets represents a bold venture, and will constitute a major step forward in the evolution of the international monetary system. We must embark on this venture with courage and with utmost care. Inasmuch as it is thought unlikely that the existing sources of reserves would provide an adequate basis for world trade and payments in the future and that any other national currency would become a new international currency, the new reserve asset, which must be compatible with the evolution of the existing system and which must contribute to a greater stability of the international monetary system, is bound to be one created on the basis of joint obligations of a number of countries and will essentially represent the right to obtain currencies from other participants in order to acquire dollars needed for market intervention by monetary authorities.
It is 22 years since Bretton Woods, when the present international monetary system was established. One of the remarkable features which evolved in the course of the development of Fund policy is that drawings from the Fund by countries in temporary balance of payments difficulties are accomplished by the provision of a mixed bag of national currencies. Reserve units or deliberately created reserve assets now being considered in various forums are on the asset side of a mixed bag of obligations of the countries concerned, and thus fundamentally and economically the characteristics of such new reserve assets and IMF drawing rights tend to merge. I believe the very fact that national currencies, when jointly used, can perform internationally what they by themselves alone cannot perform should be highly assessed in the context of the evolution of our international monetary system.
I should like to emphasize once again that it is urgently necessary that each country promote international cooperation in order to remove the uneasiness and tension which has troubled the international monetary system for the past several years. …
As the stability of proceeds from exports of primary products is essential for the development of the developing countries, I welcome the decision made recently by the Executive Directors of the IMF to enlarge its compensatory financing scheme, and hope that a study made by the staff of the World Bank on the supplementary financing scheme will be further explored, with close contact maintained between the two sister organizations. …
In concluding I earnestly hope that we, who are working in the international financial field, might make greater progress in the coming year in solving the two major problems before us, namely, the improvement of the international monetary system including the creation of new reserve assets and the furthering of economic aid to developing countries, with far-sighted wisdom and the spirit of international cooperation enabling courageous decisions.
Statement by the Governor of the Bank for Jordan—Hatim S. Zu’bi
… We are pleased by all the efforts made to increase international liquidity at a pace consonant with the expansion of international trade. This increase, however, must, at the same time, meet the foreign exchange requirements of vital projects in developing countries. Since all countries have a serious stake in such an increase we hope that decision making in this regard will not be the monopoly of any group small or large but will be the decision of the international community as a whole.
In conclusion, may I say that these hopes, I am sure, are shared by many of my colleagues on the Board of Governors, and it is our aspiration that in a spirit of enlightened, objective, and impartial cooperation we can work toward a better world and higher standards for all our peoples.
Statement by the Governor of the Fund for Germany—Karl Blessing
I should like to join those who have expressed to our American hosts our sincere thanks for the warm welcome once again extended to us here in Washington. I should also like to express our profound appreciation of the excellent work performed by the Fund and the Bank and its affiliates since we last met in this hall 12 months ago. …
As regards the monetary field, I should like to congratulate the Fund on its excellent Report and on the work it has performed in a year where strains in the international monetary system have persisted. I am glad to say that the energetic measures taken by the British authorities in July offer much better prospects now for the improvement of the British balance of payments and for the relief of the strains resulting from them. I also welcome the measures recently announced by the U.S. authorities in the field of fiscal policy to dampen the overheated American boom, thus contributing to better internal and external equilibrium.
For my country the past year was quite an eventful one. A year ago the general demand was too high, inflationary pressures persisted, wage increases by far exceeded productivity gains, prices had gone up by about 4 per cent, and the balance of payments remained adverse. The main reason for this inflationary process was the high liquidity generated by the payments surpluses of the past. It proved to be quite difficult to absorb the originally abundant liquidity in spite of severe restrictions applied by the central bank and in spite of the fact that the balance of payments deficit was allowed to exert its effect on liquidity. It was not until the end of 1965 that our policies produced results; since then, this policy has worked in an almost classic way. In the course of the year 1966 internal stability improved considerably and our balance of payments became less adverse than it was a year ago. Demand is now in better equilibrium with supply, price increases slowed down remarkably, and the labor market is less strained than before. Contrary to 1965, our exports are rising faster than our imports, partly due to a dampening of demand, partly due to the boom in the United States and to the expanding demand in France and Italy. In order to balance our external accounts we need, however, a high surplus in trade which we have not yet attained. But the prospects of reaching equilibrium are better now than they were a year ago.
Of course, monetary policy would be facilitated if budgetary and fiscal policies were to share the burden of such a correction. As in a number of other countries, in Germany also the burden of curbing demand fell, at least in the beginning, mainly on monetary policy. I think that not only in Germany but elsewhere, too, it would be much better if a well-designed “policy mix” between monetary and fiscal measures were applied. If monetary policy is overburdened, disruptions and lower growth rates may ensue. In Germany we are at the moment in the midst of legislative efforts to set up at least the basic elements for a budgetary policy aiming at stability.
From our own experience I should like to draw the conclusion that internal and external disequilibria can in fact be overcome by mere monetary measures, provided that the countries concerned are courageous enough to apply hard measures and to act in good time. Overspending in domestic and foreign investment and overspending in consumption—be it in the public or in the private sector—are the result of an excessive money supply, and overspending normally leads to balance of payments deficits. Such deficits are no matter of fate but depend on human decisions.
Of course, there will in practice always be certain disturbances of international equilibrium, induced by seasonal, cyclic, or structural factors. As long as no major and persistent deficits occur, this is quite legitimate. If these deficits, however, are large and sustained, they are apt to endanger the whole international monetary order. That is the trouble from which our monetary system is suffering today. Coordination and confrontation of the economic and monetary policies of the major countries, multilateral surveillance to control deficit financing, and the proposed “early warning system” are of special importance. It is, however, not only for the national experts but also for the national politicians to pay due regard to the needs of the balance of payments and to accord it a proper place in the scale of economic objectives. Let us be quite clear that one of two things must become more elastic: either the adjustment process or the exchange rate. An improvement in the adjustment process is therefore what we need. There is good reason to support emphatically the efforts now being made in Working Party 3 of the OECD to improve the adjustment process.
The postwar trend at first led to a desirable replenishment of the monetary reserves of the world out of the U.S. balance of payments deficit. Since this deficit has continued for a number of years this has gradually brought about an overabundance of dollars. Neither can the United States go on increasing its short-term liabilities to foreign countries substantially, nor are the other countries prepared to build up their dollar holdings in the same measure as hitherto. The Group of Ten was quite right when in its latest study it subscribed to the view that the most important means of maintaining confidence in the reserve currencies and strengthening the monetary system is a restoration of equilibrium in the balances of payments of the reserve countries. There is indeed no alternative to this. If no additional fresh dollars or pounds sterling were to be generated by deficits and fed into the international system, the danger of a sudden shrinkage of existing exchange holdings with its possible deflationary consequences would doubtless be less, although even then this danger would not be eliminated. That is why I still regret that the Group of Ten has not seen its way to endorse the German and Italian proposals of step-by-step harmonization of the ratio between gold and foreign exchange in the monetary reserves of the major countries. Fortunately, international cooperation and consultation have nowadays, compared with the period between the two wars, been greatly developed. It may, therefore, be expected that dangerous disturbances from a sudden conversion of exchange reserves into other reserve media, in particular into gold, can be avoided. Nevertheless, we shall do well to bear in mind the susceptibility of the present monetary system and to keep the fire brigade, which we possess today in the form of the International Monetary Fund and the cooperation of central banks, ready for action.
When the U.S. balance of payments deficit has been eliminated, as is the aim of the U.S. authorities, we will probably face a new situation. The American balance of payments deficit has provided, during the past six years, more than two thirds of the increase in the gold and foreign exchange reserves of other countries. Gold alone is not sufficient to supply the world with reserves, as an increase of the price of gold, for good reasons, is out of the question. Thus, we may at some point in the future need a new reserve medium to supplement gold. All the countries of the Group of Ten are agreed that the present world supply of reserves is sufficient and that deliberate reserve creation shall not take place before the deficits of the reserve currency countries will have been eliminated.
Nevertheless, in our view, it would be useful even now to enter upon some contingency planning. In doing so a clear distinction must be made between a contingency plan and actually creating additional reserves. In order to allay the fears existing in important circles, safeguards against premature or improper use must be taken. An important question in this connection is who is to make decisions on a new reserve medium, and in what way. In this respect the Group of Ten agreed that when making future decisions the following two points must be observed: first, the interest of all countries in a smooth functioning of the international monetary system, and, secondly, the responsibility of a limited group of major countries who in practice would have to provide a substantial portion of the financial backing for any new reserve assets. In planning such reserve assets we must take care that they do not dislodge the dollar from its present position.
In his opening address the Managing Director pointed out that it might be useful now to begin with informal meetings between the Executive Directors of the Fund and the Deputies of the Group of Ten. I agree with this view and I hope that within a reasonable time further progress will be achieved.
In conclusion, I should like to say that our efforts must first of all be directed toward the improvement of the balance of payments situation. The essential point is the willingness of the countries concerned to accept the restraint a sound monetary system calls for. Too ambitious rates of growth and too ambitious welfare programs are detrimental to sound money. Let us not forget the old adage: He who drives carefully in the long run not only travels safest but also fastest.
Statement by the Governor of the Fund for the United Kingdom—James Callaghan
I begin by expressing the gratitude of my Government for the excellent reports made to us by the International Bank and the International Monetary Fund, and for the most helpful and thorough surveys which Mr. Schweitzer and Mr. Woods presented to us yesterday. I should also like to join in welcoming Singapore and Guyana as new members of the Fund and Bank, and we hope to see the Gambia in next year.
As Mr. Schweitzer pointed out, the role of the Fund continues to grow in importance and diversity, and I single out for mention particularly the successful work of the staff and Executive Board on compensatory financing. My Government welcomes the decision to expand this important facility.
I note and welcome the growth of cooperation in the field between the Fund and the International Bank. The objectives of the Fund and Bank are the same—namely, to promote the healthy growth and prosperity of all their members. …
The World Scene
We meet here at the end of a year in which trade and output continued to grow at high rates, much of this buoyancy being imparted by the rapid expansion in the United States.
Import demand in the industrial countries generally has been rising and is apparently still rising at a healthy rate, and although the imports of the less industrialized world have been growing a little less rapidly than in 1964, 1965 was a good year for world trade and it looks as if 1966 will be much the same.
An unwelcome feature of the situation is that interest rates, both short-term and long-term, have been rising continuously in the major industrial countries for about 3 years. Most short-term rates have now reached what are historically very high levels—many, indeed, have not been as high for 40 years.
I think the main reasons are clear enough. We have had a long period of rising prices in the world. On top of that, levels of demand—and demand for capital in particular—have recently been very high in a number of industrial countries, the United Kingdom among them. Faced with this situation, they have taken restraining measures among which tighter monetary policies have played an important part. There is a danger that the tighter credit and higher interest rates which may be appropriate to any one country in the management of its own affairs may lead to competitive increases round the world from which none of us gains and all will suffer. If nations give a greater emphasis to fiscal policies, this could help to ease the difficulties and might in due course help to bring down interest rates from their present high levels to the benefit of the industrial nations as well as of the developing nations. Here I fully endorse the views put forward in the Report on the Adjustment Process by Working Party 3 of OECD.
As it is, short-term funds have been induced to move from center to center. This has caused strains in the international payments system. World markets have been somewhat nervous and concerned of late as a result of this world-wide monetary stringency, and we have seen competition for short-term funds. Fortunately, the system of international monetary cooperation has adapted itself to the needs of the situation.
The extension of swap networks announced on September 13 has already had a calming effect on markets. Excellent and useful as these arrangements are they cannot by themselves solve all the problems that lie ahead of us.
The Economic Outlook
In the period ahead, it seems possible that there may be a slowing down in the rate of growth in the United States. As for the United Kingdom, it seems unlikely that there will be much expansion of activity for the time being. As regards our balance of payments, we have recently made a new assessment of our present prospects following on the measures we imposed last July. We have taken into account the sharp change in our domestic outlook and the continuing buoyancy of world trade. We have assessed our export and import prospects, our income from invisibles, and the possible savings on overseas government expenditure. As a result we can now be confident that Britain will move out of deficit and that, taking 1967 as a whole, Britain will enjoy a healthy surplus in her balance of payments over all—that is, on current and capital account combined. It was also encouraging that the Commonwealth Finance Ministers in Montreal last week came to the view that the sterling area as a whole is likely to be in surplus next year. We can therefore look forward to a substantial strengthening of sterling over the period ahead. This is a most welcome development, but it will have repercussions in other ways. A move by the United Kingdom from a substantial deficit into surplus is bound to affect the payments situation, as will our repayment of debt to the Fund due at the end of 1967.
In the longer run, world trade will feel the consequences of the efforts of the two reserve currency countries to correct their balances of payments. But, in the immediate future, I see no reason to fear a drastic curtailment in the growth of world trade, provided that the momentum of expansion is maintained in the main economies of continental Europe.
Those countries with a substantial level of reserves may reflect that if they allow their current account to become unfavorable that will help the process of adjustment and will also be a means of keeping domestic inflation in check. But if the countries with substantial reserves do not act in this way, then plainly there will be increased pressure on international liquidity. If more extreme policies are followed and those countries which already have high reserves maintain policies designed to raise these reserves to a still higher level at the same time as the reserve currency countries are moving into surplus, then our liquidity problems will really become acute.
World liquidity has recently increased less than in the past periods. In 1965 there was little increase in the world’s owned reserves. The proportion of gold output which has found its way into monetary reserves has been small. We accept that the level of world reserves should not depend upon the deficits of the reserve currency countries. But it is equally illogical that it should depend on the amount of gold that the world’s mines can produce. I see no prospect that world liquidity in the next year or two will revert to anything like the rate of expansion of the 1950’s or early 1960’s.
Against this background what progress have we made in the past year, both in the Group of Ten and as a result of the recent studies carried out by the Fund staff and by the Executive Directors? I recognize that a good deal of spadework has been done, both by the Fund and by the Deputies of the Group of Ten, and as a result we are now in a position to press on with the wider discussions which we hope will lead to an agreed contingency plan. We know from experience how long it takes to reach agreement among ourselves on these complicated matters. Thereafter any agreement we may reach will have to be ratified by our Parliaments. Therefore, even if we were all convinced that an increase in liquidity were necessary, the earliest date at which we could implement such a plan would be 1968. I am sure we should be failing in our duties if we do not in the coming year do all we can to reach basic agreement on a contingency plan. It would be a great tragedy if, after all the effort that has gone into the study of this question and is now going into our negotiations, we failed to have a workable plan ready when the need arises.
My country accepts the proposals made by the Managing Director of the Fund for joint meetings to take place between the Fund Executive Board and Deputies of the Group of Ten. I also welcome the confirmation by the Ministers of the Group of Ten of their earlier recommendation that these joint meetings would provide the wider framework which is needed to enable all countries to express their views. It seems to me the way is now open for us to press forward with our work, and it is my hope that we shall have a contingency plan before us for consideration at the next IMF Annual Meeting.
The Elements of a Contingency Plan
We have not yet come to the stage of putting together a specific plan. But the wide-ranging international discussions of the past year, in the Fund, in the Group of Ten, and elsewhere, have shown two things. First, so far as the technical details are concerned there are ample components now ready for assembly when we have reached agreement on the few, but important, problems which still remain to be solved. Secondly, there is broad agreement about two principles on which any plan must be founded. On the one hand, all countries must share both in the distribution of any new asset and in the responsibility which goes with the creation of international money. On the other hand, it is evident that, as a matter of simple fact, those responsibilities will fall most heavily on the major countries which play the biggest part in the world’s trade and payments. No scheme which fails to reflect these two principles can be expected to work successfully over the years.
But the two principles are not always easy to combine and reconcile when it comes to organization and detail. Indeed, when the Ministers and Governors of the Group of Ten met at The Hague last July, almost all the unresolved questions then before us were concerned with just this problem.
There is, for example, the vital question of how we are to decide that the time has come to put a scheme into actual operation. The arrangements for that must, of course, properly reflect our two principles. But, I suggest that this may be a case where it may be best to leave the principles, so far as possible, to apply themselves. Clearly, in the decision to create and issue assets to all Fund members all must have their say. But clearly also, before any proposal of this importance is activated, it will only be wise to make sure that the countries on whose support the value of the asset will chiefly depend are in broad agreement that the proposal is timely. In this process of exploration I suspect that it will prove best to use informal methods of arriving at a consensus rather than to rely too much on arithmetical formulae for voting. It may prove easier to agree the need when the time has come than to define criteria or majorities to tell us that the need exists. It is like the boy who was asked to describe an elephant, and who replied, “You can’t define it, but you will certainly recognize it when you see it.”
Likewise, it is my view that there must be participation by all Fund members in the backing of a new asset. In operation the asset will derive its value from the obligation of all members to buy it against their own currencies. But manifestly the obligation of those members whose goods and currencies enter most into international transactions will count for most, with all of us, in assuring the asset’s value.
There are other difficult questions still to be resolved, such as those governing the conditions under which the asset is to be held and used. Here I suggest the aim must be to give all members the assurance that no one will make use of the asset in a way which will put undue burdens on his fellow members and that no individual country will be expected to carry an undue share of the total amount of the asset in issue. I am confident that ways can be found to provide these assurances.
As to the form which the new asset should take, I would not wish to take a rigid position, but I must confess to having a marked preference. The choice is between a drawing right and a new international monetary unit. I appreciate, of course, that a drawing right, with which we are already familiar in the Fund, can be set up and operated so as to be virtually identical with a monetary unit. But, to the ordinary man, a drawing right conveys a right to borrow, not a basic international asset to be held in a country’s reserves. We are engaged now in, preparing for the establishment of a new international reserve asset on which I, for my part, hope that a truly international monetary system will be built in the course of time. For such a purpose a simple monetary unit is surely the form to choose.
But even the establishment of a new unit will only be a stage in the evolution of the international monetary system as a whole. Once introduced, the asset will have to find its place alongside the other reserve assets of gold and reserve currencies. There is no doubt at all that reserve currencies will have a continuing and important part to play in this system. But I would expect that, at times of pressure, there might be some tendency to move out of reserve currencies into the new units—a tendency which I expect would be reversed when the pressures had been corrected. Unless provision can ultimately be made to accommodate such ebbs and flows, which are unavoidable in a mixed asset system, we may find that we have provided ourselves with a scheme to create new liquidity without the means of defending ourselves against the destruction of existing liquidity. These are matters on which a good deal of further thought will be needed. Meanwhile, our immediate need is to press ahead with further discussions that will lead to a contingency plan being placed before us next year.
I have glanced at a few of the problems we have to solve. No doubt some of them will present us with considerable difficulties before we reach a solution acceptable to all of us. But it is important to set difficulties in the context of our overriding aim, which must be to strengthen the world’s payments system. All our efforts will prove abundantly worthwhile if at the end of these discussions we have evolved a system which encourages sound economic growth, full employment, and stable prices in all countries, developed and developing alike.
Statement by the Governor of the Bank for Afghanistan—Abdullah Yaftaly
It is an honor and a pleasure to participate in these meetings marking the twentieth year of operations of the World Bank and International Monetary Fund. It is also a pleasure to again enjoy the warm hospitality of the host country, the United States.
I want first to compliment both the Bank and the Fund for presenting highly informative and stimulating Annual Reports. We whose economies are in the early stages of development are vitally interested in the continued efforts of these institutions in promoting price stability and accelerated rates of economic growth through increasing the flow of both capital and knowledge.
These meetings find Afghanistan nearing the end of its Second Five-Year Plan period. We are now in the process of putting into final form the Third Five-Year Plan, which will go into effect in March of next year. The progress we have made to date in creating the basic elements of an essential infrastructure is reflected in the much greater emphasis in the new Plan on the goods-producing sectors of agriculture and industry. The recent and prospective tightening of world markets for grain convinces us that far more effort should and will be devoted to the production of foodstuffs during this forthcoming planning period. All of our governmental policies and budgets will be designed to provide incentives and to assist our farmers and entrepreneurs to produce more goods for home consumption and for greater exports.
The last two years have been particularly auspicious ones in relations between Afghanistan and the Fund. In June 1966 the highly successful first stabilization agreement with the Fund was ended, and early in August we entered into a second year’s agreement. Probably of even more importance, I should note that Afghanistan repurchased the equivalent of $4.3 million during the current year.
We are achieving substantial progress in making internal economic conditions in Afghanistan more conducive to sound economic growth. Sharply increased revenues and better fiscal controls have significantly curtailed the inflationary pressures that were with us for so long. We are proud of our performance in stopping inflation and bringing about relative price stability. The foreign exchange rate of our currency has stopped its decline and has been essentially stable for about a year. Likewise, we have been able to increase our international reserves. Large increases in savings in the banks over the past two and one half years and greater confidence of the people in the economic future of the country have led the Government to decide to undertake a bond sales program. We are now strengthening credit facilities for both agriculture and industry with the help of the World Bank institutions and other sources of capital and technical assistance.
As I have said, we take pride in having brought inflation under control, but neither we, nor any developing nation, can afford to slow down the pace of economic growth as a price to be paid for price stability. Rather, we must achieve both. We know we must pursue difficult and austere fiscal and monetary policies as a means to prevent inflation and to facilitate economic expansion. But we also know that large-scale capital flows from the developed nations and from international institutions continue to be essential to speed the progress of the developing countries. We must both help ourselves and have an inflow of capital and technical assistance if the great gap between the have-not and the have nations is to stop growing, let alone be narrowed. We must enlarge capital flows, the transmission of know-how, the volume of trade, and the liquidity base for financing and settling international transactions.
Although action has not yet been taken in the field of international liquidity and reserve creation, we are pleased to see that discussion of these problems has moved beyond the exploratory stage. We are favorably impressed with that part of the Managing Director’s proposals concerning extension of quasi-automatic drawing rights on the Fund. We feel that administratively the Fund, as presently constituted, could and should handle added schemes for increased liquidity and reserves, and that the creation of an additional organization should be avoided. The nations with the largest foreign exchange reserves and those whose currencies play a particularly significant role in international financial flows are understandably most concerned with liquidity problems, but theirs is not the exclusive concern and they should not make all the decisions in this critical area. We feel that any final decisions should be made by the majority of Fund members, including, of course, the developing countries. At the same time, of course, we cannot realistically expect one country to be the major source of reserve creation when this would force that country to bear the burden of large continuing deficits in its balance of payments.
We are pleased to see that the United States has finally succeeded in reducing its deficit and hope this trend will continue. To reduce pressures on the dollar and the pound sterling, and to assure adequate liquidity and reserves, we believe that the resources and the role of the International Monetary Fund should be increased and that every effort should be extended to make strong European currencies, such as the deutsche mark and the French franc, among others, acceptable as international reserve currencies. The IMF should also re-evaluate its policies, especially with regard to drawing rights of its members. The 25 per cent of quota is inadequate. …
The serious implications of the rising debt-service requirements in the less developed economies are far-reaching. When combined with the possibility of generally harder terms on new loans, the possible effects on the future course of economic development are sufficiently severe to warrant serious examination and consideration. We therefore appreciate the understanding of this situation shown by World Bank President Woods and by IMF Managing Director Schweitzer and commend them for calling attention to these problems in recent statements. We applaud Canada for taking the initiative in cutting or abolishing interest rates and softening the terms on which loans are provided.
… let us not overlook the vital training contribution being made by the Economic Development and the IMF Institutes. During their years of operation, the Institutes have provided the quality of training that can be highly influential in the success of national development efforts. We would like to see the training efforts of the Institutes expanded, without compromising standards, so that fewer qualified nominees for training would have to be turned away. …
Thank you for your interest and patience. I sincerely hope that a year hence we can report even greater progress in Afghanistan, and that the help of the Bank and the Fund will continue to supplement our own expanding efforts to fulfill more nearly the needs and aspirations of our people.
Statement by the Governor of the Fund and Bank for India—Sachindra Chaudhuri
Mr. Chairman, I would like to begin by expressing my warm appreciation of, and congratulations for, the excellent addresses by you, Sir, and by Mr. Schweitzer and Mr. Woods. These addresses reflect the forward-looking, yet pragmatic, approaches to the problem of international economic cooperation that are so vital for orderly achievement of accepted goals. I would also like to welcome our new members.
The last year, like previous ones, has been very active for the Fund in terms both of the volume of business and of thinking and planning ahead. I welcome the increase in the Fund’s net income and the proposal to transfer this record surplus of $44 million to the General Reserve. This disposition of the surplus is completely satisfactory, especially in view of the larger and more diversified functions and responsibilities that the Fund will, it is expected, have to undertake in the years to come. I was also happy to learn that the present compensatory financing facility is being enlarged and liberalized. The problem dovetails into the larger one of securing a steady increase in the export earnings of the less developed countries, and continued cooperation and assistance to this end from international agencies and the more developed countries is still needed. While it is right to stress the advances made in international monetary cooperation, we cannot lose sight of the fact that there are aspects of our problems and policies which are disturbing. I share Mr. Schweitzer’s concern over rising interest rates in the industrial countries, the tardy performance on liberalization of trade policies by the richer countries, and the relative stagnation of developmental aid.
Over the last 12 months substantial further work on international liquidity, especially on the techniques of deliberate reserve creation, has been done. I found the discussion on this subject in the Report of the Executive Directors of great interest. Useful ground has also been covered in the Group of Ten and under the auspices of the United Nations Conference on Trade and Development. All these various initiatives have led to a greater degree of consensus on this crucial question of international monetary reform than was the case when we met last in this forum.
We have reached some consensus of opinion that contingency planning is necessary. The need for reserves is not confined to any particular group of countries, and it is generally realized that in any scheme of deliberate reserve creation the needs and interests of all members of the international community must be recognized. This is a distinct gain. Any creation of reserves has an impact on all countries within the international payments system. This is why we have to be sure as to the precise implications of the term “global” or “universal” that is often used in this context, especially as in the literature available one discerns some disturbing signs of a dualistic approach.
I accept the idea that deliberate reserve creation, when undertaken, should have reference not to the balance of payments deficits and the consequential needs of particular countries but to the over-all requirements of the international community. If this is the approach, it follows logically that decisions as to the activation of whatever scheme of contingency planning emerges, and the follow-up thereon, should be taken internationally, that is, in the well-established forum of the International Monetary Fund. The interest and concern of the developing countries in international liquidity is not confined to just a share in the distribution of newly created reserves; it relates to the very basis on which monetary cooperation among the nations of the world should continue and advance and, therefore, to the process of decision making itself. The entire discussion focuses on a new development of far-reaching import, and it must, in my view, be planned as an act initially, as well as throughout, of the international community as a whole.
But the area remaining to be covered is difficult. It relates mainly to the concrete form and mechanism of the arrangements to be made for creating and administering new international liquidity. There is urgent need now to focus all further discussion in a central forum, and this can only be the institution in which all of us present here are represented. If joint deliberations between the Executive Directors of the Fund and others who have worked on these issues are to be undertaken, they should proceed in terms of certain basic ideas and methods of work which have become part of the mechanism of international economic cooperation. In the decisive stages of building for the future we must look not merely at the fleeting alignment of pulls and stresses but at the long-term requirements of the new international economic community that we wish to evolve. And most important of all, there should be no question of our accepting solutions which at all weaken the structure and traditions of international monetary cooperation symbolized by the Fund.
I cannot emphasize too strongly that what is involved here is not some petty point about procedure and protocol. What is really at stake is the system of international economic cooperation that we have so assiduously built up over the past 20 years. The international community is made up of a great many nations with differing needs and interests as, indeed, with differing capabilities. But this has not prevented us in the past from evolving new and constructive ways of furthering our common human objectives. Should we then start our quest for a new era of international economic cooperation by underlining our differing needs and interests and capabilities, or rather emphasize the fact that all these differences must converge to a point where they become a new source of strength for all of us? There is little point, therefore, in debating whether there is a clash or cleavage between the “general” interests of all Fund members and the “particular” interests or responsibilities of some of them, or, whether one group of countries needs primarily aid and another liquidity. What we need to stress, in short, are the positive aspects of our common endeavor, namely, that we want monetary reform that is truly international, universal in its scope, uniform in its application to all members, and implemented by the tried and trusted institution that we already have for this purpose. …
Statement by the Governor of the Fund and Bank for Australia—William McMahon
It is an honor to represent my country at the Annual Meetings of the Fund and the Bank. These meetings form the summit of discussions on international financial and economic matters in which the Fund is the acknowledged leader on the monetary side. The significance and reputation of these two institutions continue to grow and to command our admiration.
World economic activity has been expanding strongly. For the first time in the postwar period, the resources of virtually all the industrialized countries are fully employed. But growth and development have been uneven, and the triple goals of world prosperity, full employment, and decent living standards still beckon in the distance. There is in truth so much more to be done, and we must not permit the momentum of the last few years to be lost. We must do all we can to stimulate further progress.
Let me mention some of our more pressing problems. First, as we know, the rate of economic growth of many of the less developed countries has been disappointing; the net flow of international economic aid has remained static over the past 5 years; and the terms of aid have tended to harden. During this period Australian official aid has been raised by about 70 per cent, and Australia stands almost alone in making its bilateral aid available wholly in the form of grants. We hope that other countries may be encouraged to adopt similar aid policies.
External aid of this kind can never play more than a marginal role in solving the problems of the less developed countries. We must look mainly elsewhere for the answers. I think increasing emphasis should now be given to measures likely to expand the international trade of the developing countries. Australia has already taken the initiative in extending preferences to less developed countries, and we think the time has come for the industrialized nations to give primary producing countries greater access to their markets. Complementary to market access is the problem of fluctuations in world commodity prices. We welcome the Managing Director’s announcement that the Fund has decided to liberalize its compensatory finance facility, and we hope too, as the third ingredient, that it will be possible to negotiate commodity agreements aimed at reducing the wide fluctuations in world prices of various primary commodities.
There is another avenue worth exploring: our experience in Australia illustrates the role private capital can play in development. There are two criteria of success—the developing countries must provide a political and economic climate favorable to overseas investment, and the developed countries must encourage capital to flow freely. We understand the reasons for the restrictions on capital flows imposed by the United States and the United Kingdom. On the other side, we stress the heavy responsibility of other countries which are enjoying substantial surpluses in their international payments and are building up large reserves. In their own interests and in the interests of others, they should further develop their international capital markets.
Some of them, too, could well make bolder use of a greater variety of economic and financial weapons in their efforts to achieve balance at home and abroad. They might, for example, by concentrating more on fiscal than on monetary policies, help to encourage investment abroad and discourage excessive additions to their own international reserves. Unless such policies are adopted, international interest rates will tend to remain at excessive levels, and a substantial part of international liquidity—a subject to which I now turn—will become frozen and noneffective.
My second thesis concerns international liquidity, which is one of the most important problems now before us. If a shortage of liquidity is allowed to develop, it could lead to a general slowing down in world trade and in economic growth. If that happened, we would all be worse off. At the same time, I believe that reserve creation is no substitute for good financial management.
There are understandable differences of opinion on the adequacy of international liquidity. In my view we are clearly reaching a stage where liquidity might well be insufficient. Powerful forces exist which could easily produce an early shortage. The argument can be crystallized in these three illustrations: (1) Over the past 15 years, reserves have been rising at about 2.6 per cent per annum; world trade has been increasing at an annual rate of about 6 per cent; as a result, world reserves have fallen from about 67 per cent of world trade in 1951 to about 43 per cent today. (2) Another factor of critical importance is that the United States is anxious to overcome the deficit in its balance of payments—an objective which is supported by the main surplus countries. (3) The gold element in international reserves has failed to keep pace with the rise in world payments transactions, and gold hoarding has increased. The policies of building up gold and gold-guaranteed reserves by some of the major creditor countries is a clear indication of doubt and uncertainty in the international exchanges.
Others may argue that these signs are not sufficient evidence of an imminent shortage of international liquidity, but we must be prepared for all eventualities. In my view, it would be imprudent to take the risk of permitting tightening reserves to threaten the smooth functioning of the world trade and payments system. So I again emphasize the urgent need to find a solution under which the availability of adequate, but not excessive, reserves will be assured to support the future working of the international financial system.
In contrast to the situation a year ago, there is now wider recognition of the need for forward planning. With one notable exception, the Group of Ten has accepted the need for “contingency planning.” This was a wise and farsighted decision, although the term “contingency” implies that the critical period may perhaps be more remote than it might in fact turn out to be.
I sum up my own general approach in this way:
(1) Specific proposals should be prepared and submitted to us at our Annual Meeting next year.
(2) These proposals should deal solely with the problem of international liquidity, as it is improbable that rapid progress will be achieved if we attempt to deal simultaneously with the question of finance for development.
(3) The Fund—which has the major responsibility for the efficient working of the international monetary system—should be the principal forum in which these proposals should be considered and finally converted into a detailed plan.
(4) All Fund members should share, in a nondiscriminatory fashion, in the distribution of any newly created reserve assets. There is, I am glad to say, widespread support for this view.
(5) The proposals should ultimately lead to a plan under which the creation and the amount of additions to international liquidity will be carried out within the general framework of the Fund, thus enabling the views of all Fund members to be taken into account on these critical aspects.
I would add two qualifications—both of which relate to the Group of Ten. I strongly oppose the idea of discrimination within the world financial institutions: no group of countries can assume an exclusive right to predetermine, outside the Fund, matters vital to the interests of all Fund members. Frequently I have asked myself what characteristic distinguishes this particular group from other Fund members—apart from the fact that each country represented in the Group is in the Northern Hemisphere. I have not yet found a persuasive answer other than that they were originally regarded as the major creditor countries because of their participation in borrowing arrangements with the Fund. But we all know how quickly international positions can change: the creditor of today is often the debtor of tomorrow. Since the Group was first formed, a number of other countries, including my own, have established creditor positions in the Fund—and, more importantly, have demonstrated their willingness and ability to assist the Fund in its operations. There have been changes in the status of some countries within the Group of Ten, and more are bound to occur.
We recognize, as a fact of life, that a new system of reserve creation must have the willing support of the major industrial countries. Equally, a new international system must be acceptable to Fund members generally. Implicitly this recognizes—and I would agree—that there should now be talks between the Executive Directors of the Fund and the Deputies of the Ten. They should, I suggest, be quite informal, with the fullest possible scope being given for the free exchange of views and ideas between all those who can contribute to a solution. The whole aim—and the only aim—should be a pooling of views from which a consensus within the Fund can be evolved. At our next Annual Meeting we should, with good will from all, be able to consider a report from the Executive Board on concrete proposals for reserve creation.
My second qualification relates to the manner in which decisions might be made on the creation of additional liquidity. These should be made in the Fund—but with a recognition that, if the financially stronger countries are to be called upon to accept special obligations, they can reasonably expect to receive special consideration in the decision-making process. It should be possible, in the proposals to be made to Governors, to devise arrangements which will accommodate these views. Such arrangements must not, however, be allowed to divide the Fund membership into two or more predetermined groups: this could be avoided, we believe, if the status of individual Fund members in the decision-making process were related in some way to their relative credit positions in the Fund at the time decisions are being taken.
Finally, I refer to the supply of gold. The fixed price of gold has had a depressing influence on gold production. As far ahead as we can see, gold is likely to remain the foundation of our international liquidity system. We should therefore face up to the challenge of finding a way to augment gold production and to increase the proportion of output that flows into monetary reserves. I repeat the suggestion put forward by my predecessor at the last Annual Meeting that the Fund should study and report on these questions. By the time we assemble again next year, I hope some solid progress will have been made.
I have said, and I repeat, that the momentum of progress in world trade and development must not be lost. Positively, we should strive to increase its momentum. The forces of inertia being strong, it is easier to lose rather than to gain pace. For each and every one of us, the dominant aim should be to achieve the goals set out in the preambles to the Articles of our institutions. I express my deep conviction that these will remain the goals of all members.
Statement by the Alternate Governor of the Fund and Bank for Korea—Se Ryun Kim
On behalf of the Government of the Republic of Korea, I would like to commend the Fund and the Bank Group on their solid and worthy achievements for world-wide economic progress during the fiscal year 1966.
The Fund and the Bank Group have rendered Korea valuable assistance and cooperation toward its economic development during the past few years. The extension of the stand-by arrangement in March 1966, with increased stand-by credit, has played an important role in generating domestic and international confidence in the Korean economy. The relationship between the Fund and my Government has been further strengthened by the valuable technical assistance provided by the Fund continuously since late 1964. …
I am very glad to say that in recent years Korea has shown a high rate of economic growth with financial stability and also a remarkable improvement in its balance of payments. The annual rate of growth of the real national product has exceeded 8 per cent for the last few years. As the result of a marked increase in fixed investment, secondary industry made notable progress and played a leading role in our economic development. Conspicuous improvement has also been made in the balance of payments; exports in 1966 are expected to be twice those in 1964. We have also been successful in curbing inflationary pressures by our strict adherence to a stabilization program in which reform of the exchange rate and the interest rate structure have been key elements.
The First Five-Year Plan has been a success and will be completed this year. The Second Five-Year Plan will be initiated in 1967. In this period, we hope to continue our recent record of high economic growth and stability. We are well aware that the initiative and resources of our people are the essential ingredient for our continued growth and development. We have set ourselves high goals for the mobilization of domestic resources for the Plan, and we will make every possible effort to achieve them. Still there will be a need for capital formation beyond our present resources and to meet this need we look forward to continued support from friendly countries and international institutions. Our development plan contemplates that, as we progress, our need for external assistance will gradually be reduced. …
Many developing countries have contracted not only long-term loans, but also have had to rely on short-term and medium-term capital to implement their economic development programs. The debt-servicing obligations arising from the high level of their external indebtedness have added a considerable burden to their balance of payments. It is necessary for industrial countries to recognize this, by easing the terms of their development assistance and by offering such assistance on a stable basis. …
The subject of international liquidity has received a thorough examination in Chapter 2 of the Fund Annual Report. This question has also been studied in other forums. We are in full agreement that a supplement to existing reserves will be needed in the near future. It is essential to maintain a properly functioning international monetary system and thus facilitate economic development.
A plan for reserve creation should be negotiated as quickly as possible so that it can obtain governmental approval and be ready for activation when the need arises. It is, of course, gratifying that there is full recognition that all countries have an interest in international liquidity and that deliberately created reserves should be distributed to all member countries. It inevitably follows from this conclusion that all Fund members must have an appropriate role in the decision-making process associated with the deliberate reserve creation. We are, therefore, in full agreement with the basic approach underlying the Managing Director’s proposal that reserves should be created in the Fund.
As for the future discussions leading to the development of a plan, the Managing Director has suggested a series of joint meetings of the Executive Directors with the Group of Ten. We believe that this is a useful way of proceeding and that these meetings should begin as soon as possible.
I also wish to congratulate the Executive Directors on efforts and studies to liberalize compensatory financing facilities of the Fund in order to perform a vital role in meeting new requirements in the field of international liquidity.
Statement by the Governor of the Fund and Bank for Singapore—Lim Kim San
Last year, as the representative of a country seeking membership in the Bank and the Fund, I had the pleasure of attending the meeting of the Joint Boards, but only as a silent observer. This year, as representatives of a newly admitted member, my Delegation and I have, in addition to the pleasure of attendance once again and of renewing friendships made last year, the opportunity and privilege of giving voice to our feelings and opinions. May I, therefore, first of all congratulate you, Mr. Chairman, on your deserved election and assumption of office. I should like next to express our thanks for the very kind words of welcome which have been extended to us by you, the President of the World Bank, the Managing Director of the International Monetary Fund, and by our many friends among the Delegations here. I should like to say in response to this welcome that small as Singapore is in size (only about 220 square miles) and in population (about 2 million), we aim to play our part in both the Bank and the Fund’s policies and operations, and that, on the other hand, we expect to call upon and receive from them the advice and assistance they have been rendering to all their members.
We are indebted to both Mr. Woods and Mr. Schweitzer for their excellent and comprehensive Reports and for their further statements in review of the past year’s operations. It is valuable that the Bank’s and the Fund’s operations, and the problems which individual members tend to see perhaps only within their own limited field, can be viewed in broad world perspectives, even if the outlook seems somewhat gloomy in certain directions. …
I should now like to say a few words on the International Monetary Fund, with which our association has been much more recent. In the past year, we have been in discussion with our sister country, Malaysia, from which we separated scarcely more than a year ago, in an attempt to find an arrangement whereby our two countries can continue to use a common currency. We have both had assistance from the International Monetary Fund, and although all the hard work that has been put in by everyone concerned, ministers and officials alike, has not led to favorable results, we wish to place on record our thanks to the IMF for their advice on technical aspects of currency issue and control.
Singapore will issue its own currency from June 12, 1967, under a Currency Board system, which means that our currency will be backed 100 per cent by gold and foreign exchange reserves. We feel that, whatever the merits of a central banking organization, at the present stage of the development of our economy, it is more important to have a strong stable currency which will inspire the confidence of surrounding and faraway countries with whom we trade. We have, therefore, decided to eschew greater independence in the currency system, with its possibilities also of credit management and deficit financing, and to subject ourselves instead to the disciplines of automatic convertibility and the necessity to earn every dollar which we want to use for importation of goods. We propose with this convertibility to eliminate foreign exchange controls, the absence of which will be beneficial for our entrepôt trade. These objectives are, we feel, in keeping with those of the Fund, and we shall be looking for guidance from the Fund in attaining them and also in solving our other problems.
Statement by the Governor of the Bank for Somalia—Ali Omar Scego
In taking the floor once again in this meeting, we wish first of all to express our sincere thanks for the warm hospitality the United States and the City of Washington have kindly shown us.
Last year, we had the opportunity to appreciate this hospitality, and now, after one year, we meet here again to review the work accomplished in these last 12 months, to consider the most important problems that have occurred during this period and, at the same time, to examine, on the basis of past experience and within the framework of our associations, the urgent and long-term needs of our organizations.
In the year which has lapsed since the last Annual Meeting in this City of Washington, the scale of international cooperation within our institutions shows an impressive record, both in the financial and technical assistance which member countries have been receiving from the World Bank, its affiliates, and the International Monetary Fund. Fellow delegates will, I am sure, join me in congratulating the management and the staff of our institutions for the measure of international cooperation which has been made possible in their wisdom and devotion. …
Turning now to the related question of monetary and financial stability and the maintenance of an efficient payments system, the International Monetary Fund as a center of cooperation in this field has proved to be an efficient mechanism. We in Somalia have had the privilege of benefiting, on more than one occasion, from the technical and financial assistance which the Fund has increasingly been putting at the disposal of its members. Somalia, like most developing countries, was subject to financial and monetary pressures due mainly to the nature of our economy and to our development effort. In introducing programs of stabilization, the Fund’s help, both in the technical and the financial fields, has been indispensable to us. We are mentioning here particularly the financial and the technical assistance we have been receiving to introduce and implement a new trade and exchange system in Somalia. One indication of our success in this field, thanks to the generous assistance of the Fund, is the fact that Somalia has as yet not drawn on its last stand-by arrangement, as a result of the financial and monetary measures which we have maintained in cooperation with the Fund.
With regard to the much discussed problem of reserve creation and international liquidity, member countries have a common interest in maintaining a climate of international financial and monetary stability by observing international rules within the framework of the International Monetary Fund. This, by itself, is a recognition that pressures of economic development do not blind us to stability. Recent international discussions on world liquidity were indeed an indication of our concern to reconcile monetary and financial stability with the development needs of the world economy, and studies which have been made by the International Monetary Fund and others should pave the way for eventual agreement on deliberate reserve creation and reasonably sufficient liquidity. But whatever the mechanism or formula of reserve creation we may choose, it must include not only the principles of financial responsibility but also the equitable allocation of new reserves among the member countries and within the framework of the International Monetary Fund.
We may conclude by noting that our institutions have limited resources to cope with all the problems which face the member countries. The success of our institutions therefore depends to a large extent on the international confidence which they can inspire among all their members.
From the Reports of the Bretton Woods institutions we know that the problems of development facing the larger part of mankind are enormous, and the efforts required in the years to come are beyond the resources these institutions can command. Therefore, it is a matter of urgency that adequate international resources should be found if we are to cope with these problems adequately. In the opinion of my Delegation, the pool of international resources both for payments and investments problems should be enlarged. The only way this can be achieved is for the poor and the rich to agree mutually on a program of partnership whereby the rich contribute more generously both in amount and terms to the development effort.
On the other hand, what the less developed parts of the world can contribute is self-help, not only in mobilizing their own resources, but in making better use of international assistance.
September 27, 1966.