Presentation of the Sixteenth Annual Report1. By the Chairman of the Executive Board and Managing Director of the International Monetary Fund

International Monetary Fund. Secretary's Department
Published Date:
November 1961
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Per Jacobsson

May I begin by saying how much pleasure it gives me that this year’s Annual Meeting is being held in Vienna. For me, personally, our presence here brings back memories of quite a long time ago—of the time of the League of Nations Reconstruction Scheme for Austria after the First World War. In the summer of 1925 I served as one of the secretaries to Mr. Walter Layton (now Lord Layton) and the late Professor Charles Rist, who had been asked by the League Council to report on the economic position of Austria. These two experts came to the conclusion that Austria was economically viable; but when they made their report at the League of Nations Headquarters in Geneva there were those who thought that they had been too optimistic and dubbed them, after a vaudeville show then running in London, “the co-optimists.” This time, however, the optimists proved right. Whatever the vicissitudes through which this country has had to pass, it has undoubtedly established itself as a proud and independent nation, thanks to the fortitude, resilience, and vitality of its people: qualities as deeply rooted in them as those of charm and good humor, which are perhaps more readily apparent.

A year ago, when our Annual Meeting was held in Washington, 68 countries were members of the International Monetary Fund. Today we have 73 members. Thus in the last 12 months 5 new members have joined the Fund—Laos, Nepal, New Zealand, Nigeria, and Portugal. A number of other countries have applied for membership, and it is expected that several will be able to sign the Articles of Agreement in the next few months. The increase and expected increase in membership reflect the emergence in recent years of many new countries, particularly in Africa, all of which we shall be glad to welcome as members of the Fund; but I think it also indicates a growing appreciation of the usefulness of the Fund as a center for consultation and as an institution capable of rendering valuable service to all its members. I would think that the usefulness of the Fund has been made even more evident by the intense activity in the year since our last Annual Meeting. In this year, not only have the financial operations of the Fund been larger than in any other year of the Fund’s history, but there has also been very considerable activity in other ways.

It might be of some interest to examine the developments of this last year against the background of the situation at the end of 1959 and early in 1960. Many countries were, of course, faced with difficulties, but world economic activity was generally at a high level and showed signs of increasing. The adoption of external convertibility by a number of European countries at the end of 1958 had clearly been successful, and there had been an almost all-round increase in their gold and foreign exchange reserves. The rise in the general price level had been much less accentuated during 1958 and 1959, holding out the hope that the postwar inflation had at last been contained.

The improvement in the monetary position was underlined by the acceptance early this year of the formal convertibility of their currencies, under Article VIII of the Fund Agreement, by 11 countries: Belgium, France, the Federal Republic of Germany, Ireland, Italy, Luxembourg, the Netherlands, Peru, Saudi Arabia, Sweden, and the United Kingdom. This was greatly to be welcomed, and brought the total number of countries which have accepted the obligations of Article VIII to 21. It is also satisfactory that we have now started regular consultations with Article VIII countries in accordance with the view expressed by the Executive Directors in their decision of June 1 last year.

The growing freedom for the international movement of funds, as a result of the increased convertibility of currencies, and the greater stability of prices—so welcome in themselves—have, however, created new problems which the world has not had to face since the start of the Second World War. Some of these problems were discussed at our last Annual Meeting, others have developed since that time. I believe that much of the disquietude that arose in this new situation was not really justified, but while it lasted it certainly exerted a disturbing influence. In the United States, mainly under the impact of a change in inventories once prices had become more stable, industrial production declined after the spring of 1960 and unemployment increased to the highest percentage since the end of the War. In the spring of this year, however, business activity began to recover, so that the setback proved to have been of short duration. Even so, it was not without influence on the international monetary situation. As was natural in a period of recession, interest rates in the United States declined; and with boom conditions and fairly high interest rates ruling in most European countries, it was to be expected that there would be an outflow of funds from the United States. This outward movement coincided with growing misgivings about the competitive power of the U.S. economy, and also with some apprehensions connected with the election. A temporary flight from currencies into gold led to a steep rise in the price of gold in London, which in turn intensified these fears and gave an impetus to fresh rumors and speculations. All this occurred at a time when there was a remarkable and continuing improvement in the basic position of the U.S. balance of payments. Imports were tending to fall as a result of the decline in business activity, but exports had risen substantially, and there was a trade surplus of more than $4.5 billion for the whole of 1960. Together with the net income from investments and services, the United States had available some $6 billion to meet government expenditure abroad, including military expenditure and official assistance of all kinds. Thus the only uncovered foreign payments were of a capital nature—private long-term investments abroad and the outflow of short-term funds. Toward the end of the year and in the early months of 1961, the net income from trade and services rose further and was sufficient to cover practically all the long-term private investment abroad at the current rate, in addition to government expenditure abroad.

It was in this improving situation early in February that the President of the United States made his statement that steps would be taken to safeguard the value of the dollar, and that the dollar price of gold would be maintained. In addition, the President declared that “the United States has never made use of its drawing rights under the International Monetary Fund to meet deficits in its balance of payments. If and when appropriate, these rights should and will be exercised within the framework of Fund policies.” Assisted by reductions in discount rates in Europe and a determination to avoid any great decline in short-term rates in the United States, the outflow of short-term capital subsided, and, with certain advance repayments from abroad, there was a substantial improvement in the over-all balance of payments position of the United States.

The U.S. trade balance was helped by the strong boom which continued in most industrial countries in Europe, as well as in Japan. Compared with 1959, these countries increased their imports by about 20 per cent in 1960, and this was sufficient to lift the volume of world trade by about 10 per cent. Even such a large increase in European and Japanese imports was not sufficient to raise the general level of raw material prices, which in fact declined slightly over the year. Since many of the less developed countries are dependent on the export of only one or two primary products, even a relatively moderate decline in the prices of these products may create difficulties in their balance of payments; and with only slender reserves to fall back on, many have turned to the Fund for financial assistance. Thus the general weakness in the prices of raw materials and foodstuffs has been reflected in the work of the Fund, which has had an unusually large number of transactions with the less developed countries.

In all, 32 countries from all the continents of the world have received financial assistance from the Fund or have had drawing rights under stand-by arrangements during the period since our last meeting. With the exception of the United Kingdom, all of these countries can be said to depend largely on the export of primary products. But the balance of payments difficulties which these countries have experienced have not as a rule been due solely to weakness in the prices of their export products, for many have also suffered from excessive internal demand connected with their own credit and fiscal policies. As long as the general level of prices on world markets was still rising, it was possible to expect that in the individual countries a certain amount of credit expansion would be absorbed by rising prices; but now that the general price level is more stable, an expansion of credit beyond the current requirements of the economy is likely to be reflected with little delay in a deficit in the balance of payments. In several cases, the situation has been rendered more difficult by the continued maintenance of complex and discriminatory exchange systems. With the widespread desire to establish or maintain orderly monetary conditions and to simplify exchange systems, Fund assistance has generally been requested in support of fiscal, monetary, or exchange programs and the assistance has been given in the form of stand-by arrangements. In fact, of the 22 countries which have drawn from the Fund during the past year, all but 3 have entered into stand-by arrangements.

It would clearly be impossible for me to discuss in detail all these financial operations of the Fund. I should, however, like to mention briefly a few which have had unusual features and which seem to me to be of particular interest.

First of all, I should like to say a word about the drawing and stand-by arrangement granted to Yugoslavia at the end of last year. A total of $75 million, together with substantial credits from the United States and a number of European countries, was made available to Yugoslavia in support of an extensive exchange reform and program of trade liberalization designed to strengthen the Yugoslav economy and to integrate it more closely with the world economy. The immediate drawing, of the equivalent of $45 million, was made in six currencies—French francs, deutsche mark, Italian lire, Netherlands guilders, sterling, and U.S. dollars. This was the first occasion on which a drawing was divided among a large number of currencies in accordance with the policy of diversifying the currencies to be used in drawings and concentrating on the currencies of countries with strong payments and reserve positions. The drawing of Italian lire was the first that had been made in that currency.

The operation with Chile in February of this year also contained a number of special features. The financial difficulties created by the earthquakes in May 1960, and uncertain prospects for the world price of copper, led Chile to enter into a stand-by arrangement with the Fund for the equivalent of $75 million in order to help maintain its program of economic stabilization. At the same time, Chile drew Argentine pesos amounting to a further $16 million to be used in partial settlement of the balance accumulated by Argentina under the bilateral trade and payments agreement between the two countries, which had already been terminated in anticipation of the transaction. This was the first time that a Latin American currency had been drawn from the Fund, and the first time that the Fund’s resources had been used directly to assist a member to terminate a bilateral arrangement in accordance with an Executive Board decision taken in 1955. In addition, Chile was the first country whose outstanding drawings and available drawing rights under a stand-by arrangement exceeded the equivalent of 100 per cent of its quota.

Four particularly large transactions—with Australia, Brazil, India, and the United Kingdom—have been carried out during the last 5 months. In these transactions, the policy of diversifying the currencies to be drawn and concentrating on the currencies of countries in strong payments and reserve positions was continued.

The transaction with Australia in April, which involved a drawing totaling the equivalent of $175 million in seven currencies and a stand-by arrangement for an additional $100 million, was made in support of the Government’s efforts to improve its foreign payments position by means of fiscal, monetary, and other measures. These efforts have been most successful, and I am happy to be able to add that, in view of the improvement in the position, the Australian authorities canceled the stand-by early this month, after it had been in effect for only 4 months instead of a year.

Under the stand-by arrangement concluded with Brazil in May, the equivalent of $160 million was made available to support a broad financial program of fiscal, credit, trade, and exchange measures, designed to combat inflation and to achieve balance of payments equilibrium within the framework of a free and simplified exchange system. In addition to the stand-by arrangement, the Fund agreed to the rescheduling of the repayment of previous drawings totaling the equivalent of $140 million. The arrangement with the Fund has been supplemented by substantial credits from other sources and by renegotiation of Brazil’s medium-term foreign obligations. Rapid advance has been made in unifying the exchange system, and early in July the Brazilian Government transferred to the free market all payments which had previously been effected at preferential rates.

The drawing by India approved in July, which totaled the equivalent of $250 million, was made in six currencies. These included Japanese yen, and this was the first occasion on which a member country had drawn an Asian currency from the Fund. India, whose foreign exchange reserves had fallen to a low level, requested the drawing at a time of seasonal reduction in certain raw material exports, and in order to bridge the time lag in the receipt of development aid under the Third Five Year Plan.

With these large transactions and the many smaller ones, it is clear that the Fund has done much to assist countries, both large and small, which are endeavoring to diversify their production and generally to develop their economies, but which still depend mainly on the export of primary products. Insofar as such development is financed by long-term foreign capital, the actual use of these resources will normally be reflected in a deficit in the current account of the balance of payments. Provided that the other elements of the balance of payments are in equilibrium, this current account deficit would be matched by the external financing, and there would then be no over-all deficit. When this has not been the case, requests have frequently been made to the Fund for financial assistance, and then the purpose of the assistance granted has been to help the countries concerned to put their over-all situation in balance. The three-to-five-year period for which such assistance has generally been granted has been intended to provide the time needed for the appropriate measures to take effect, and thus to relate the long-term development to the available long-term finance.

Turning now to the transaction with the United Kingdom last month, I would like to describe briefly the background of the international movements of funds which preceded it. I have already referred to the large movements of funds out of the United States last autumn and winter—partly to take advantage of high interest rates in Europe. A part of this flow went to the United Kingdom, where a construction boom and a marked increase in investment in plant and equipment had led to a substantial demand for finance and, consequently, to a high level of interest rates. The inflow of funds from the United States and other centers led to an increase in reserves, in spite of the deteriorating position of the current account of the U.K. balance of payments. The British Government used part of the increase in reserves to repay in advance the drawing made from the Fund in 1956, and also to reduce the Fund’s holdings of sterling to 75 per cent of quota.

Following the statement made by the President of the United States in February, the outflow of funds from the United States was sharply reduced, but there was still a movement of funds into a number of countries on the Continent in Europe, especially Germany, due at least in part to continued rumors about the revaluation of the deutsche mark. The revaluation of the deutsche mark and of the Dutch guilder by 5 per cent early in March, however, gave rise to a new crop of rumors about further currency changes. All this proved very damaging to confidence, particularly in sterling, because of the deterioration in the current account of the U.K. balance of payments. The authorities in the countries concerned strongly denied the rumors, but to small avail. It was even believed that the Swiss franc would be revalued, despite the growing deficit in the current account of the Swiss balance of payments, to which the Swiss National Bank drew attention.

In this situation, a number of central banks—members of the Bank for International Settlements in Basle, as well as the Federal Reserve System in the United States—decided to cooperate more closely in the spot and forward exchange markets and in the granting of credits. In this way, substantial resources were provided in aid of sterling, but this in itself did not arrest the outflow of funds from London. Steps were needed to remove the imbalance in the British economy and to obtain the external resources required while the steps were taking effect. Using, inter alia, certain powers proposed in the budget that had been submitted in April and voted in July, the British Government introduced toward the end of July a comprehensive series of fiscal and monetary measures, and certain other policies, designed to eliminate the deficit in the current account of the balance of payments without imposing any restrictions on trade or current payments and, in particular, to restore confidence in sterling at the existing rate of exchange. The measures adopted by the United Kingdom showed the Government’s determination to deal with both the immediate situation and developments over a longer period, particularly in relation to future budget expenditure and to the level of costs.

In support of these measures, the United Kingdom drew from the Fund the equivalent of $1.5 billion in nine currencies: U.S. dollars, deutsche mark, French francs, Italian lire, Netherlands guilders, Belgian francs, Japanese yen, Canadian dollars, and Swedish kronor—the first time the last currency had been drawn from the Fund—and, in addition, entered into a stand-by arrangement for the equivalent of a further $500 million. The U.K. authorities announced that, of the amount drawn, the equivalent of some £ 200 million would be used during the following month or two for repayment of credits. This transaction with the United Kingdom was by far the largest ever entered into by the Fund; and in order to replenish its holdings of the currencies drawn, the Fund sold gold valued at $500 million to the countries concerned, in the proportion of one third of the U.K. drawing in each currency.

The six transactions which I have mentioned are noteworthy for the size of the amounts involved and other special features, but it would be a false picture of the Fund’s activities if it were concluded that the transactions with other countries had not also been of real importance. Perhaps the simplest way for me to indicate the wide range of Fund transactions is to enumerate all the countries which have received financial assistance from the Fund over the last 12 months. Twenty-two countries have drawn from the Fund, namely, Argentina, Australia, Bolivia, Brazil, Ceylon, Chile, Colombia, Ecuador, El Salvador, Honduras, India, Indonesia, Iran, Mexico, Nicaragua, Paraguay, South Africa, Turkey, both the Egyptian and the Syrian Regions of the United Arab Republic, the United Kingdom, and Yugoslavia. In addition, 10 countries—Costa Rica, the Dominican Republic, Guatemala, Haiti, Iceland, Morocco, Peru, Spain, Uruguay, and Venezuela—have had stand-by arrangements in effect during the year, although they have not found it necessary to make use of their drawing facilities. In fact, Spain felt able to cancel its stand-by arrangement with the Fund 5 months before it was due to expire.

It is of interest to note that 18 of the 20 Latin American Republics are included in this list. Over the years, Latin American countries have drawn the equivalent of some $1.1 billion from the Fund. With the equivalent of a further $400 million available under unused stand-by arrangements with 16 of them, it is clear that the Fund has played a significant role in assisting the countries of Latin America in their efforts to overcome financial and economic difficulties.

With all the activity during the past year, drawings on the Fund have totaled the equivalent of nearly $2.5 billion. So large a use of resources has had a marked effect on the Fund’s holdings of currencies suitable for transactions at the present time. Even after the replenishment of these holdings by the sale of gold at the time of the drawing by the United Kingdom, the Fund’s holdings of several convertible currencies are very low. In addition, it has to be remembered that there are open balances under stand-by arrangements equivalent to almost $1.1 billion.

It had, indeed, become apparent at the end of last year, at the time of the strong outflow of short-term funds from the United States, that if the Fund were faced with substantial drawings by a number of countries with large quotas, its available holdings of convertible currencies would in all probability be inadequate. This has been borne out by the experience of the last few months. The Fund can, of course, make use of its gold holdings, but these are not necessarily revolving, and once they have been used for the replenishment of currency holdings they may not readily be restored by repurchases in gold. Therefore, the Fund should generally be careful in the use of its gold and should take into account other possibilities for replenishing its currency holdings, for instance, by the borrowing of particular currencies under Article VII of the Fund Agreement.

However, borrowing of currencies is not a method of replenishment that can suddenly be improvised. For this and other reasons, the whole complex of problems connected with such borrowing needs to be closely examined and brought to an effective solution. Consideration of these problems should be set against the wider background of the international monetary system. In the vivid discussions on the merits and demerits of the present system which have taken place in recent years and months, attention has largely been devoted to the tensions which may result from the international flow of funds in a world of convertible currencies. As you know, a number of suggestions have been put forward advocating more or less radical changes in the existing monetary arrangements. It has been valuable that these matters have been so vigorously discussed, and the first question we have to ask ourselves is whether the present system can be regarded as operating in a manner sufficiently satisfactory to be worth maintaining. If that question is answered in the affirmative, then we must consider whether any particular measures should be taken to strengthen the existing institutional arrangements so as to provide sufficient safeguards to meet any dangerous tensions that may arise.

On the whole, I believe the system has worked well. It would indeed be difficult to conclude otherwise in the light of the great gains that have been made in recent years. In the purely monetary sphere, external convertibility has been established for a broad range of currencies; and with the better distribution of reserves, there is an increasing measure of freedom for capital movements. There has been a parallel development in the ever-growing liberalization of trade and, under conditions of relatively stable prices, international trade has been increasing at an annual rate of about 4 per cent in recent years, reflecting by and large a corresponding rate of growth in world production. These are no mean achievements.

But in spite of these achievements there have been periods of tension and unease. I do not think that the movements of short-term funds from one country to another have impaired the financing of trade or the flow of goods, but it is largely the fears that these movements have aroused that have led to the questioning of the soundness of our present system. In some quarters, doubts have been expressed whether the system under which countries hold part of their international reserves in currencies (which is known as “the gold exchange standard”) will work satisfactorily in the longer run, and whether this system might not break down as it did in the interwar period. I do not think we need draw that conclusion, for it is important to remember that the currency failures which occurred in the early 1930’s were caused not by inflation, but by widespread deflation—by a fall in prices which made itself felt first in the United States and then in Europe. I am sure there will be no similar deflation now, for there has been such a change in the objectives of the authorities that sufficient measures would surely be taken to prevent such a calamity, if it seemed to be threatening. Secondly, in the 1930’s the exchange reserves of many of the European countries had been acquired by large-scale short-term borrowing, and they melted away when the short-term loans were not renewed; today, most countries are the true owners of their exchange holdings. A third difference is that the International Monetary Fund today stands behind the nations’ reserves, supplementing them within the framework of its principles and practices and working at all times to promote international monetary consultation and collaboration. There was no similar international agency in the interwar period.

Today two currencies, the U.S. dollar and sterling, are the main reserve currencies. There is no doubt in my mind that the authorities in the United States and the United Kingdom are determined to pursue policies which will ensure confidence in the stability of their currencies. Of the outstanding short-term U.S. liabilities, about two thirds are in the hands of foreign central banks and governments, and the remainder is largely held by commercial banks and business firms. For sterling, the proportion is very much the same. There are thus substantial amounts of these currencies in private hands, and with convertibility, liquid resources owned by business firms and banks can now, with little or no difficulty, be shifted from one country to another. There is indeed no lack of international liquidity in private hands, but for this very reason it is important that there should be adequate resources in official hands to meet the possible impact of international movements of private funds.

As indicated in the Report of the Executive Directors before you, the Fund has been studying in the course of this year a broad range of problems, some of general import and some of a more detailed technical, legal, or institutional character connected with this situation. It is possible to summarize the main issues that have been considered in the form of three questions. To begin with, what are the payments difficulties for which the Fund’s resources may be made available under its Articles of Agreement? Secondly, how can the Fund best use its resources to meet these difficulties? And, finally, what resources are required to meet the difficulties, and are the Fund’s available resources adequate to do so?

On the first question, the Executive Directors have discussed the extent to which the Fund’s resources may be used for helping to meet those deficits in the balance of payments of members that go beyond the current account and are attributable, in whole or in part, to capital transfers. From a purely practical point of view, there is of course great difficulty in separating current and capital payments under a system of convertible currencies. After a thorough examination of the various aspects of the problem, the Executive Directors have clarified the understanding of the Articles of Agreement, and in that way eliminated any doubt, which had not already been dissipated by the practice of the Fund, that the Fund’s resources can be used for capital transfers, in accordance with Article VI and the other provisions of the Articles. If a country facing an outflow of capital were to turn to the Fund for assistance, the test to be applied by the Fund would be in accordance with its accepted principles, i.e., that appropriate measures were being taken so that the disequilibrating capital outflow would be arrested and that assistance provided by the Fund would be repaid within a maximum period of three to five years.

The answer to the second question—how the Fund can best use its resources—must take into account the strengthening of the current position and reserves of several member countries and the increased number which have accepted the obligations of Article VIII. This has made possible the use of a much wider range of currencies held by the Fund, thus increasing the volume of its usable resources. The Fund has therefore sought to diversify the use of its currency holdings in such a manner as to ensure that transactions with the Fund, and their repayment, will be conducted in those currencies which will be most helpful to the world payments position. In pursuing this objective, the Fund has been guided increasingly by the principle that drawings should be made in the currencies of those countries that have a strong payments and reserve position, while it is to be hoped that repayments will generally be made in those currencies that can be strengthened by their use in this way. There are a number of technical and legal problems to be faced in evolving a satisfactory program for the use of a wider range of currencies in Fund transactions and repayments. Some have already been resolved, others will need further attention. A measure of the success already achieved is shown by the fact that during the last year drawings have been made in 11 different currencies.

As a result of sales of their currencies by the Fund, a number of countries have now acquired increased drawing rights because the Fund’s holdings of their currencies have been reduced considerably below 75 per cent of quota. The Fund must always take account of the fact that, should there be a reversal in the payments position, the existence of these increased drawing rights could give rise to appreciable demands on the resources of the Fund.

I come now to the third question—the adequacy of the Fund’s resources. It will be apparent from what I have said about the Fund’s evolving policies on the currencies that should be drawn that the answer to this question cannot be settled simply by adding up the Fund’s holdings of gold and currencies, or even gold and convertible currencies, at any particular time. What is important is to ensure that the Fund has enough of those currencies which it would be appropriate to use at any particular time, given the economic conditions of that time and the purposes for which it is appropriate to use the Fund’s resources.

I have already referred to the fact that the intense activity over the last year has reduced the Fund’s holdings of certain currencies to a very low level, despite the recent sale of gold. But this is more than a transitory problem confined to the present circumstances, and is more than just the question of the Fund’s own liquidity. It is vital to consolidate and defend the system of convertibility built up over the last few years, and to avoid the risk of any relapse into restrictions and currency disorder. In order that the Fund may play its part in this effort and meet the expectations of its members, it must be in a position to provide resources that are adequate beyond doubt to meet any needs that may arise. And in a world in which market fears and expectations play a large role, resources—national and international combined—must not only be adequate to meet demands that may be made on them, but must also be large enough to convince the public that they are adequate to defend currencies from ill-advised speculation. A substantial reduction in the Fund’s holdings of major international currencies could itself become a disturbing factor, long before the point of exhaustion is reached, unless there existed satisfactory arrangements for replenishing these holdings.

All these questions have to be evaluated in the light of the swift changes in the balance of international payments that have occurred in recent years. In the circumstances, I cannot conclude that the composition and size of the Fund’s resources are adequate to support a healthy international financial structure without further strengthening. The need for additional resources might be remedied by an increase in particular quotas, but in present circumstances I believe it can be handled more acceptably by firm borrowing arrangements. These would be concluded, in particular, with the main industrial countries, because of the major role they play in the swings in international trade and payments. This does not mean that other countries would have no interest in the conclusion of such arrangements, for the maintenance of a stable and convertible exchange system is as important to them as it is to the industrial countries.

Some of the problems arising from the use to be made of the Fund’s borrowing powers under Article VII of the Fund Agreement have already been discussed in general terms by the Executive Directors, but many aspects still remain to be considered. An essential step in the conclusion of any borrowing plan is for the authorities in the individual countries to obtain the power to lend to the Fund if they do not already possess it. However, in my opinion, it would not be sufficient to leave the actual borrowing transaction to an ad hoc agreement between the Fund and the lending country under these powers. There is great merit in an assurance that additional resources are available to the Fund for its transactions. The ready availability of resources is in itself a contribution to stability and strength. It has time and again been the experience of the Fund that assurance to a member that it has access to the resources of the Fund under the provisions of a stand-by arrangement is in itself a stabilizing factor of great importance; often it has not been necessary for the member to use all, or indeed any, of the drawing rights thus assured. There is good reason to believe that the same sort of benefit would be obtained from credit facilities granted to the Fund.

At the same time, adequate provision would have to be made for general safeguards for the lending members. There would, of course, be consultation between the Fund and the prospective lender, and it should be part of the arrangement that the Fund would not borrow from a member country unless the country’s payments and reserve position permitted this. Moreover, the arrangement would be such that any member that had lent its currency to the Fund would be able to obtain repayment readily if its own payments position changed. There would, of course, be no question of any weakening of the principles that the Fund has worked out for the appropriate use of its resources. These have stood the test of time in a great variety of circumstances, and we know that they are endorsed by the members of the Fund.

I believe that it should not be difficult to arrive at an agreement that will give due weight to the various aspects of borrowing, and thus to establish a workable system which would be beneficial and acceptable to all members of the Fund. There are, however, a number of decisions of policy still to be taken.

As is said in the Annual Report of the Executive Directors, the approach to the increase in the Fund’s resources by means of borrowing “looks beyond the immediate needs and endeavors to equip the Fund to handle flexibly the many and varied situations that may arise under a system of freely convertible currencies.”

When we consider the Fund’s role in the monetary system, it is valuable to keep in mind the two complementary aspects of the Fund’s financial activities: on the one hand, the granting of financial assistance by the Fund to help countries to meet an unbalanced position; on the other hand, the assurance that the country receiving the assistance will be taking the necessary measures to restore a proper balance. For such measures to be effective, it is indispensable that the authorities in the country receiving the assistance must be convinced that the restoration of the balance is in their true interest. As the Duke of Vienna said in “Measure for Measure,” the only play of Shakespeare to be set in this City of Vienna: “The satisfaction I would require is likewise your own benefit.” It is precisely when this identity of interest is fully realized that the programs which are supported by Fund assistance can be carried out in a spirit of mutual confidence and the desired success achieved. For that result, the countries must feel that stability is essential for their welfare as the only true foundation for sustained growth. In taking this view, they can be encouraged by the evidence that those countries which have persisted in their efforts, and accepted the transitional difficulties of carrying out a stabilization program, have succeeded in staging an impressive rate of growth.

One of the requirements for economic progress is the availability for investment of real resources, and these cannot for any length of time be obtained by inflationary methods of financing. This is an old truth, but it seems that it has to be rediscovered over and over again. To obtain genuine resources requires, of course, effort. At the time when the richer countries are making considerable efforts to provide resources for the aid of the less developed countries, these countries in turn will have to make the maximum effort to mobilize their own resources, and, through stability, create the conditions for domestic and foreign resources to be used in the most effective manner. In creating these conditions, a great many countries have had the support of the Fund, and there can be no doubt that the Fund has thus contributed to the growth in production and trade that has occurred during the last few years.

All this seems clear enough, but I believe it is not convincing to all minds. While I think that nobody will want to maintain that sustained growth can be based on monetary disorder, there seems not seldom to be a lingering fear that stability will mean reduced economic activity, and even stagnation. It is true, of course, that stability is not enough, for the real national objective should be economic growth. Economic growth can be compared with the construction of a good house, with stability as its foundations. A good house can only be erected on a solid foundation. Preparing the foundation, however, is not sufficient. There must be further initiative and activity, and the necessary resources must be acquired to complete the building. In some countries, it seems that the restoration of monetary stability has almost by itself led to a resurgence of activity, and soon produced the savings to finance it. But this is not always the case; in many countries, special domestic efforts are needed, and for these efforts to be effective they have often to be supplemented by international assistance, technical and financial. To introduce monetary stability is often only the beginning of the efforts needed to achieve growth. While the subsequent efforts largely fall outside the sphere of Fund activities, the Fund does not underrate their importance and, insofar as it can, is anxious to assist these efforts in every possible way.

Broadly speaking, the financial assistance given by the Fund helps individual countries to keep in line with general monetary trends in the world economy, while avoiding measures that would be disturbing to international trade. This is an important task, but it does not exhaust the scope of monetary action. Our monetary system has to serve an expanding economy. It is not suggested that credit measures alone can engender a high rate of growth; the fiscal and economic structure and the whole range of social and market practices are of vital importance. It may, for instance, be important to remove maladjustments due to mistaken budgetary policies, or in the cost and price structure, which would retard growth. The conditions under which foreign trade is carried on are also important—and with the new trading arrangements now being established, particular attention must be paid to these aspects. The Fund in its work is naturally interested in these questions, but pays particular attention to matters of monetary policy.

Under modern conditions, the gold flow does not set fixed limits to the possible expansion of credit or international liquidity. Within each country, the credit volume may be expanded in response to demand; and the monetary authorities can also take positive action to stimulate, and provide the basis for, credit expansion. Since the Second World War, on the whole, the problem has been rather to contain the expansion of credit than to stimulate it. All countries have been more or less involved in this process, but those countries that are responsible for a high proportion of the world’s production and trade must necessarily play a major role. They are aware, however, that even they cannot act independently of the general trend, and are therefore bound to act in cooperation with each other. Sometimes similar, sometimes complementary, policies will have to be pursued according to the ever-changing situation. The methods of cooperation will vary; there will be direct contacts, but there will increasingly be reliance on international institutions.

In Article I of the Articles of Agreement, which sets out the purposes of the Fund, financial assistance by the Fund is only one of the purposes. It is also the objective of the Fund to promote exchange stability and orderly exchange arrangements; to assist in the establishment of a multilateral system of payments; to facilitate the expansion of international trade, and thereby to increase the productive resources of members; and to act as a center of collaboration and consultation. Indeed, without the close contact between the Fund and the competent authorities in member countries, it is difficult to see how any of the purposes of the Fund could be achieved. This has been proved time and again to be the case in the annual consultations with Article XIV countries. Already excellent results have been obtained in the consultations that have been begun with Article VIII countries. Here it is a question of voluntary cooperation, and for that reason I believe that these consultations will be more, and not less, effective. The cooperation has to be inspired by the notion that countries have a common interest as partners in the international monetary system. This system has to be strengthened where it is vulnerable; but the policies pursued must be such that the system plays its proper role in the process of economic expansion. To observe, on the one hand, the necessary monetary discipline and, on the other, to respond to the needs of expansion is no easy task. It raises many problems, but it is my impression that these problems are now being tackled more effectively than ever before, and with greatly increased chances of success.

September 18, 1961.

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