Presentation of the Twenty-Fourth Annual Report1— By the Chairman of the Executive Board and Managing Director of the International Monetary Fund, Pierre-Paul Schweitzer
- International Monetary Fund. Secretary's Department
- Published Date:
- October 1969
Mr. Chairman, I wish to join in thanking the Governor for the United States for his words of welcome and in greeting all who have assembled for our Twenty-Fourth Annual Meetings. I am especially happy to see here the Governor for Swaziland, which joined our institutions a week ago, the representatives of Cambodia and Southern Yemen, for which membership Resolutions have recently been approved, and the representatives of Equatorial Guinea and the Yemen Arab Republic, for which the Governors will be asked to approve similar resolutions later this week.
It is again my privilege to present to you the Annual Report of the Executive Directors of the Fund. The past year has been one of marked contrast between setback and achievement for the world monetary system. In the major national economies, progress toward better financial balance, internally and externally, is now discernible, but it has so far been disappointingly slow. In the exchange markets, strains and disturbances have been too frequent for comfort, largely as a result of past shortcomings in national adjustment policies. In one important sector—the private gold markets—the present arrangements have proved to be workable.
The past week has again been affected by considerable uncertainty in the exchange markets. However, the decision of the German Government to close the exchange markets last Thursday and Friday, and again this morning, has helped to prevent the very large speculative flows that might otherwise have occurred and that did indeed take place in November 1968 and in May of this year. But the cessation of organized dealings in a major currency can obviously not be maintained beyond a very short period without gravely upsetting international transactions.
For this reason I welcome the decision of the German authorities, which has just been announced, to reopen the exchange markets as from tomorrow. There would have been a risk that the reopening of the markets would by itself have provoked renewed speculative flows into Germany which could have had serious untoward effects on many other countries. However, the German authorities have taken further action intended to avoid possible pressures on the international monetary system. They have communicated to the Fund that they have decided that in the present conditions they will not ensure that rates for exchange transactions involving the deutsche mark within their territory will be confined within the limits hitherto observed. They will also maintain close contact with the Fund and resume the maintenance of the limits around par at the earliest opportunity.
As in previous years, the financial disturbances have been contained by intensive cooperation among monetary authorities. International financial cooperation is not an end in itself; nonetheless its achievements are real. As a result of this continuing cooperation, I am confident today that countries pursuing the right course for the restoration of their payments positions can count on the necessary international support. More broadly, this cooperation has helped to minimize the damage caused by financial disturbances to the world economy. In fact, world trade in the past eighteen months has expanded by record proportions, while production, employment, and incomes have been buoyant. Moreover, recent months have seen the culmination of the arduous international efforts of the 1960’s to provide an adequate reserve base for the world monetary system. This achievement augurs well for our ability to undertake such further improvements as may prove desirable from time to time to promote the smooth and flexible working of the system.
On July 28, twenty-five years almost to the week after the Articles of the Fund were drawn up at Bretton Woods, the first amendment to those Articles entered into force. The amendment made it possible to bring the Special Drawing Account into operation on August 6 when members with 75 per cent of total quotas had deposited their instruments of participation. By the end of last week, 68 member countries representing over 82 per cent of total quotas had become participants in this Account, and I am sure that in the months to come participation will reach a very high proportion of the Fund membership. Submitted for action by the Board of Governors at this Annual Meeting is the proposal that I have made, as Managing Director, for the allocation of special drawing rights for the first basic period, beginning on New Year’s Day of 1970. I have satisfied myself that this proposal, on which I shall have more to say later, is consistent with the relevant provisions of the Articles. I have ascertained, after the necessary consultations, that there is broad support among participants for the proposal; and the Executive Directors have concurred in it. It now rests with the Board of Governors later this week to take the first decision of the Fund to allocate special drawing rights.
The deliberate creation of reserves by the international community, in regulated amounts and according to established procedures, was for many years the hope—some said the dream—of monetary theorists. To bring the idea into the reality has required an intensive period of study, negotiation, and finally of legislation. This process has seemed long drawn out to the watching public and the financial markets, as it has indeed to those most intimately involved. But given the novelty, the complexity, and the responsibility of the task, I am convinced that the time invested in building a sound structure, and in developing the understanding necessary for the proper use of that structure, has been well justified.
Provision of a satisfactory reserve base is only one of the foundations for a smooth working of the world monetary system. The extension by the Fund of financial assistance to members in support of sound financial programs plays a key role in the international adjustment process. The continuing contribution that the Fund will be able to make in this respect should be enhanced by the outcome of the forthcoming review of quotas, to which I attach great importance.
In a more specialized area the Fund staff completed its study earlier this year on the problem of the stabilization of commodity prices; and, on the basis of that study, the Executive Directors have established a new facility. This provides for assistance to member countries that have a balance of payments need in connection with the financing of buffer stocks under commodity agreements that meet appropriate criteria. These criteria are broadly concerned with ensuring, within a proper organizational framework, that the arrangements are economically sound and are consistent with the temporary use of Fund resources. Drawings in support of such arrangements may be made, separately from use of the normal credit tranche facilities, up to amounts equivalent to 50 per cent of quota. Such drawings, together with any drawings outstanding under the compensatory financing facility, may reach a common limit of 75 per cent of quota. The problems arising from undue fluctuations in markets for primary products may at times pose serious difficulties for economic development. It has been a source of great satisfaction to me that it has been found possible for the Fund, through these two complementary facilities, to offer a special contribution toward easing these problems.
I turn now to a brief review of major developments in the world economy. In the field of national economic management, this past year has had its full share of difficulties and disappointments. Inflationary tendencies have proved unexpectedly resistant to corrective treatment. This reflects to an important degree deficiencies in policy in earlier years and an associated build-up of inflationary psychology, which in turn delayed the effectiveness of the corrective measures applied during the past year in, for example, the United Kingdom and the United States.
The long delay in bringing inflation under control in the United States has had especially serious consequences. Apart from the domestic repercussions, this has brought a deterioration in the underlying payments balance of the United States; it has also imparted an unduly expansionary impetus to the world economy. The attack on embedded inflation in the United States by means of restrictive monetary measures has entailed severe strains in world financial markets. Interest rates have risen to levels unprecedented in modern times. This has caused serious difficulties for a number of countries and in particular economic sectors. But a marked alleviation of these pressures on financial markets is necessarily dependent on an alleviation of the underlying inflationary strains; and this demands persistence with corrective measures, in the fiscal field as well as in the monetary field.
At present, virtually all industrial countries are faced with the problem of an actual or a latent excess of demand, and with associated cost pressures. In some important cases these cost pressures have become disturbingly strong. It is unfortunately clear that 1969 will see, for the second year running, price increases of exceptional and surely unacceptable magnitude. Price increases across the industrialized world—as measured in the gross national product—averaged almost 4 per cent in 1968, and this year are likely to be somewhat more. The average increase over the previous decade was about 2½ per cent. In a number of countries there has been strong public reaction against recent rates of inflation, and this has reinforced the pressure for remedial action.
The programs of restraint now being carried out in the United States, the United Kingdom, and France should improve both internal and external financial balance in these countries. It is therefore of great importance for the world economy that these programs should be pressed to the point at which they show unequivocal results. At the same time, it will be necessary to ensure that the reduction in global demand pressure that is clearly required is not carried too far. A parallel responsibility, to maintain an adequate level of domestic demand, therefore rests on countries whose underlying balance of payments positions are strong. Admittedly, in those cases where strong cost pressures have emerged, the task of policy will be especially difficult. But it is implicit in the proper working of the adjustment process that both deficit and surplus countries, in drawing up their financial policies, should take full account of external considerations.
Adherence to appropriate financial policies, and their careful coordination among the major countries, therefore has an essential part in securing better balance in international payments and in contributing to more settled conditions in the exchange markets. This role is inescapable. Whatever structural improvements are made in the international monetary mechanism, the stability of the system will in the end remain dependent on the way the mechanism is run, that is to say, on national economic policies and their mutual consistency. Structural improvements are valuable when they provide a better basis for such policies; they can never be a substitute for these policies.
It is in this light that Resolutions relating to special drawing rights and Fund quotas have been presented to Governors, and I believe this is also a useful perspective to apply to some current suggestions for further improvements in the world monetary system. A common aim of all these approaches must be to enable countries—and I now quote from the purposes of the Fund as set out in Article I—“to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” Recent experience suggests that, for this broad objective to be met, the stabilization efforts of individual countries need to be backed by a reinforcement of the system in certain key respects. Prominent among these is the restoration of an adequate, but not excessive, flow of new reserves into the system and an adequate supply of conditional liquidity.
An extensive review of recent developments in world reserves is contained in Chapter 2 of the Annual Report, which lies before you. This review points to a marked decline in the degree of global reserve ease; the last four or five years have seen a diminution in the rate of growth of reserves, as well as in the relative level of reserves, when measured against the relevant economic magnitudes. Another way of expressing this is that the normal excess of world surpluses over deficits, which has arisen in the past from the accrual of gold to monetary reserves and which should be restored in the future by allocations of special drawing rights as well, has in recent years become small and even negative.
The dearth of payments surpluses is not merely a statistical phenomenon. It has become a matter of common experience, with important consequences for policy. Thus, even countries whose reserve positions and current payments balances are relatively strong have shown little eagerness to initiate or tolerate a deterioration in their payments balances and a significant decline in their reserves. At the same time, for many developing countries, as well as for some large industrial countries, recent reserve accumulations have been achieved from a relatively modest level. It follows that scope for regular reserve growth has to be provided if the needed efforts by deficit countries to improve their payments positions are not to be frustrated by defensive actions of other countries.
The current situation in which few countries enjoy a truly comfortable balance of payments and reserve position reflects another factor aside from the dwindling of net reserve growth. In the past year or so the payments balances of leading industrial countries have been transformed into a new and unfamiliar pattern. I refer in particular to the large inflow of short-term and portfolio capital to the United States; to the large outflow of capital from Italy; and to the large outflow of long-term capital from Germany, in this case partly offset by an inflow of short-term capital of an essentially speculative character. In each of these major cases, the capital flows have been in an equilibrating direction, in the sense that they have reduced imbalances in over-all payments. These flows have to an important degree been the consequence, or at least the by-product, of the conjunctural situation and of deliberate policy measures. Their scale and relatively novel character suggest that it would be unwise to rely on their continuance; and there are cases in which this would not be desirable. Nonetheless the emergence of these equilibrating capital flows, combined with the improvements in underlying current account positions that should result from measures in the United States, the United Kingdom, and France, represents a degree of progress toward a better balance of payments equilibrium.
This progress should certainly not be overstated, and an appropriate set of national policies has to be pursued if such progress, some of it incipient in character, is to be consolidated. It is my judgment that such policies will on balance be enhanced by action to restore a normal rate of reserve growth. It is this judgment that underlies my proposal in the Resolution before you for the allocation of special drawing rights for the first basic period.
It would be superfluous for me to repeat here the full justification of that proposal contained in the accompanying report. I shall confine myself to a few broad points, relating to the amount of the proposed allocation and to the length of the basic period. It is apparent that even the most careful calculations of the trend need for reserves must be regarded as tentative and approximate at this stage. Our forward projections of reserve needs and availabilities have therefore encompassed a rather wide range for the estimate of needed reserve supplementation. The proposal for allocation of special drawing rights at a rate equivalent to $9.5 billion over the three years from 1970 to 1972 is grounded on estimates at the lower end of the range. This reflects the desirability of prudence in the initiation of this far-reaching venture. A cautious approach is also indicated by the qualified character of the progress made toward a better balance of payments equilibrium, and by the predominance of inflationary over deflationary forces in the world economy. The choice of three years for the first basic period also reflects in some part uncertainties associated with the necessary projections in this new field. There are good reasons for giving preference, in normal circumstances, to a basic period of five years. The scheme is designed to meet a long-term and continuing need, and I am confident that it will meet this need.
Parallel to the Resolution containing the proposal for activation of special drawing rights, Governors have before them a Resolution inviting the Executive Directors to formulate proposals for the Fifth Quinquennial Review of Quotas. This parallelism is not accidental. The provision of unconditional liquidity through a new instrument must be kept in a proper balance with the availability of conditional liquidity through access to the credit tranches of what is now the General Account of the Fund. In the past twelve months, drawings on the Fund have been made by 39 countries, to a total of $1.9 billion; in predominant part these drawings have been made under stand-by arrangements in the credit tranches. The recent stand-by arrangements with the United Kingdom and France, together providing for potential drawings of almost $2 billion, deserve special mention.
The contribution that the Fund can make in helping members to deal with their balance of payments problems is widely recognized. Interest among Fund members in the revision of quotas to reflect the growing size of the world economy, as well as to meet changed economic circumstances, is more widespread in the current review than at any previous time. I am sure that a satisfactory proposal, encompassing a general increase in quotas of meaningful size and special adjustments necessary to bring quotas more into line with the present economic position of member countries, can be presented to Governors in the forthcoming months.
I have already noted that the provision of additional liquidity in both unconditional and conditional form is expected to exert a helpful influence on the speed and character of international payments adjustment. It should permit and perhaps stimulate appropriate adjustment measures, but it can never be a substitute for them.
The inadequacies and delays in these adjustment measures in recent years bear an important share of the blame for the disturbances in the exchange markets. These disturbances have contributed to the feeling that ways to ensure speedier response need to be found, not only in domestic economic policies but perhaps also in the sphere of exchange rate policy. It has become more widely recognized that where other measures of adjustment are unlikely to be successful, or would conflict with important policy objectives, exchange rate adjustment should not be ruled out. This is indeed the Bretton Woods philosophy. More controversially, it has been questioned whether specific provision should be made for exchange rates to respond at an earlier stage to balance of payments disequilibria, by modifying in some degree the existing arrangements for exchange rate variation.
These are important questions, partly technical, but also raising major policy issues. During the past year the Fund has devoted much attention to investigating and refining the wide range of problems involved. This preliminary round of studies has not yielded specific conclusions; that was not indeed the primary objective. But there is, I believe, widespread agreement that what may be regarded as the heart of the par value system is not at issue: that, to quote the Annual Report, “the stability of exchange rates at realistic levels is a key contribution to the balanced expansion of international trade, and that the determination of the rate of exchange for each currency is a matter of international concern.”
The Executive Directors have already announced their intention to continue their study of the subject. This study could investigate whether a limited increase in flexibility of exchange rate variation would be desirable and attainable with the necessary safeguards; and through what means any such increased flexibility might be achieved. This could involve limited changes in the present mechanism of exchange rate variation, or simply a more active use of existing provisions. I look forward to hearing the views that Governors may express on this topic in the week ahead.
Mr. Chairman, I have dwelt at some length on the improvements in the international monetary mechanism that we have under way and under consideration. The improvements in the reserve base of the system, achieved by a great cooperative effort in the 1960’s, now provide the basis for constructive collaboration in a still wider field. Let me be specific.
For a number of years past, progress in the liberalization of trade and payments and in the area of development assistance, which began so promisingly in the earlier postwar years, has been checked, in part by balance of payments constraints. With the resumption of reserve growth on a controlled basis, any such collective payments constraint should disappear. I believe that it would be appropriate if this were to be recognized in the actions of the leading trading countries. I should like to see a decisive check to recent tendencies toward backsliding in trade and payments liberalization. I should like to see a new forward thrust in the volume and quality of development assistance.
The Fund will continue to keep these matters under close review in its consultations with members. We will also be prepared to reinforce our collaboration with the international institutions which have special responsibilities in the field of trade and aid. The removal of remaining impediments in both these areas will be a major task of the early 1970’s.
We must therefore ensure that the new facilities which we have constructed are used for their underlying purpose. While the process of renovation and adaptation in the world monetary mechanism is not complete—or is ever likely to be—the framework now exists in which the pursuit of sound policies for internal and external balance can bring a period of calm and stability to financial markets. It is in these conditions that we can pay proper attention to our central objective: the sound development of the world economy, with the liberal commercial interchanges and mutual assistance efforts that this requires.
September 29, 1969.