Presentation of the Fifteenth 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 1960
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Per Jacobsson

Looking around the world today, it is not surprising that many people take a sombre view of the widespread social and political unrest and the serious problems to be solved. It is thus most satisfactory that there are so many signs of continued progress in the economic and monetary fields, where in many respects developments have been distinctly favorable. In a great many countries investment has been at a high level, and the volume of production has been generally rising—often at a rapid pace—while there has been a conspicuous expansion of world trade, which has now continued for nearly two years. Because of the increased supplies of both primary and manufactured products, and the cautious fiscal and credit policies pursued, the boom conditions which have prevailed in many countries have not led to a resumption of inflation but have been accompanied by a high degree of price stability. The expansion of world trade, which originated in the industrial countries, has also had beneficial effects for many of the primary producing countries, which have generally found it easier to dispose of their products and to improve their payments position. It is true, of course, that for many of the less developed countries—which are as a rule the producers of raw materials—the failure of the prices of many of their products to recover has been a source of disappointment and difficulty. The Fund has maintained close contacts with these countries, and in general they have continued their efforts to restore and maintain monetary balance and to develop and diversify their economies on the basis of available resources, domestic and foreign.

While in certain countries realization has not always been up to sometimes perhaps exaggerated expectation, and strains and stresses have become noticeable as capacity limits have been reached in many of the industrial countries, fewer countries have been faced with balance of payments difficulties; consequently, there has been a reduced demand for financial assistance from the Fund. Monetary consolidation has continued, and progress has also been made in the removal of trade and payments restrictions and discrimination. It may be thought that this is painting too rosy a picture, for there are still many troublesome problems facing us, but it is worth noting how relatively well business—in the widest sense of that word—has carried on unperturbed by political events, and how the majority of countries have been able to take such difficulties as arose in their stride. This undoubtedly reflects greater economic balance and the availability of more adequate reserves.

For the Fund itself, as is clear from the Annual Report of the Executive Directors, the past year has been constructive in many respects. The Fund has continued to hold annual Article XIV consultations and has been active in giving technical assistance to member countries, and in some cases to countries which were not yet members of the Fund. In addition, the training program has been continued on the same lines as in previous years. Altogether during the past year Fund missions have visited over 50 countries, technical advisers have been resident for varying periods in 15 countries, and participants in the training program have come from 26 countries. Throughout the Fund’s consultation and technical assistance work, it has been possible to discuss fully and frankly the problems of the individual countries with the officials of those countries. A feeling of mutual confidence has been built up over the years as a result of the greater familiarity of the Fund personnel with the problems of the countries which they visit. I think it is also true to say that the officials of member countries of the Fund welcome the opportunity to examine their problems with experienced international observers.

The amount of financial assistance granted by the Fund during the last year was on a smaller scale than in the three preceding years, reflecting the improvement in the over-all monetary position, particularly in the industrial countries with larger drawing rights on the Fund. Actual purchases of currencies from the Fund, which have been made increasingly in currencies other than the U.S. dollar, amounted to the equivalent of $166 million in the year 1959-60, compared with $264 million in the preceding year. The number of countries obtaining financial assistance—12—was also less this year than last year, when 16 countries drew from the Fund. Since the Fund’s resources constitute a second line of reserves for member countries, it is only natural that its resources are less used when things go well. But the figures that I have just quoted do not by themselves give an adequate idea of the scope of even the financial operations of the Fund. For the total of purchases takes no account of stand-by arrangements. The number of stand-by arrangements granted or renewed during the year 1959-60 was the same—13—as in the preceding year, but the total amount made available under them—apart from the U.K. stand-by arrangement which terminated at the end of 1959—was somewhat greater. For the countries concerned, the lines of credit which are obtained under a stand-by arrangement, even when they are not used, serve a valuable purpose, for they help to sustain confidence merely because the members are assured that funds are available if needed. While the Fund has no power to create credit directly, since amounts drawn by one country are obtained, through the Fund, from the country whose currency is drawn, stand-by arrangements, which by their very existence strengthen the reserve position of the country concerned without any money being drawn, act in many ways as a form of credit creation.

Of the stand-by arrangements granted or renewed during the fiscal year, the majority were made in support of stabilization programs. Two of them were with European countries—Spain and Iceland—involving in both cases changes in the par value. In Latin America, the list includes Argentina, Bolivia, Colombia, the Dominican Republic, Haiti, Honduras, Paraguay, Peru, and Venezuela. In addition, Morocco entered into a stand-by arrangement when introducing a new par value, while a six-month seasonal stand-by was effected with El Salvador. It is the accepted practice for the Fund, in appropriate cases, to obtain from countries seeking financial assistance declarations of intent of the policies that they will follow. If a country is obliged to deviate from the policies specified in such a declaration, it normally consults with the Fund in order to reach a new understanding on the basis of which any further drawings may be made.

It has been the Fund’s experience that member countries have made great efforts to implement the programs contained in their declarations of intent and have made considerable progress toward improving their position. There can be no doubt that the progress made in recent years has created a “climate of opinion” in which the return to monetary stability, with greater freedom from restrictions, has become the order of the day. It seems, indeed, that in the monetary field both good health and sickness can be infectious.

There is naturally a difference between the amounts of financial assistance needed by a large and by a small country, but for the Fund the work involved is very much the same. The difficulties of introducing appropriate fiscal and credit policies, removing restrictions and discriminations, and simplifying complex currency practices, will, of course, depend upon the circumstances of each case, but it has been our experience that small countries are beset by difficulties no less hard to surmount—and indeed often harder—than those besetting their larger neighbors. This is particularly true for the less developed, primary producing countries, and nearly all Fund transactions during the past year have been with those countries whose main sources of foreign exchange come from the export of primary products.

The total resources of the Fund have been increased greatly over the past two years; with the increases in members’ quotas, initiated at the Annual Meeting in New Delhi in the autumn of 1958, the total has risen by $5.4 billion, to $14.5 billion. Only five countries have not yet accepted their quota increases, and of these it is expected that two will do so before the end of the period for acceptance, which has now been extended to October 31. In addition to the over-all increase, the Fund’s effective liquid resources have been substantially increased as a result of the moves to external convertibility, and the Fund now holds $3 billion on gold account and $7 billion in currencies which are at least externally convertible.

The total amount of currencies purchased from the Fund, and not yet repurchased, amounted on August 31, 1960 to the equivalent of $1,069 million, and the amount available to members under stand-by arrangements to the equivalent of $267 million. That the total of outstanding drawings and commitments under stand-by arrangements is so much smaller than it has been in recent years has resulted, in a large degree, from the expiration of stand-by arrangements and accelerated repurchases from the Fund. Thus during the year, Mexico, Pakistan, and the United Kingdom did not request the renewal of their stand-by arrangements. In the same period, repurchases amounted to a total of $642 million. Some of these repurchases have been made in accordance with agreed undertakings, and would thus have fallen due in any circumstances; other repurchases have had to be made because obligations have accrued as the result of increases in monetary reserves, while others have been made voluntarily in advance of any specific undertakings or obligations. These two latter categories of repurchase once again reflect the improvement in the monetary position of member countries. For the individual country, advance repurchase means that its primary reserves are reduced, while its “second line of reserves”—consisting of possible use of the Fund’s resources—is increased. From many points of view—including considerations of a more general character in connection with the flow of funds between different monetary centers—it seems preferable that a country which increases its reserves should make prompt repayments to the Fund, for the Fund would always be ready under its rules to extend renewed assistance if it should be needed.

At the last Annual Meeting two questions of a general character were discussed, and were to be considered further by the Executive Directors. On both these questions, the elimination of discrimination and the acceptance of the obligations of Article VIII, the Executive Directors agreed upon statements which were made public and which are reproduced in the Annual Report.

In their decision on discrimination, taken on October 23 last year, the Executive Directors dealt with discriminatory restrictions imposed for balance of payments reasons. They noted that there had been a substantial improvement in the reserve positions of industrial countries in particular, and that there had been widespread moves to external convertibility, and they concluded that, under these circumstances, there was no longer any balance of payments justification for discrimination by members whose current receipts were largely in externally convertible currencies. It was agreed that in some countries a reasonable amount of time would be needed fully to eliminate discriminatory restrictions, and that special problems could arise for countries when a substantial portion of their current receipts was still subject to limitation on convertibility, particularly in their relations with state trading countries.

Today an overwhelming part of world trade is paid for in externally convertible currencies, and it is gratifying to be able to report that very substantial progress has been made in the elimination of restrictions, especially in relation to the dollar area. This is, however, a continuing process; and further measures for removal of discrimination are still needed, particularly in a number of cases where they are applied against non-dollar countries.

The Fund decision on discrimination was communicated to the Contracting Parties to the General Agreement on Tariffs and Trade (GATT), which then issued a similar statement. In this connection, I may perhaps refer briefly to the Fund’s concern with the problem of eliminating restrictions in general, whether they refer to trade or payments and whether they are discriminatory or not. In relation to the GATT, the Fund may be called upon to state whether for a given country restrictions can be justified on balance of payments grounds. Questions of this kind have been examined in connection with the annual Article XIV consultations, and in certain cases the conclusion has been reached that the country in question has no balance of payments justification for the maintenance of quantitative restrictions, and the Contracting Parties have been informed of this. It is then up to the countries concerned to justify the retention of such restrictions on other grounds, or to remove them.

In this wider field of restrictions, substantial progress has likewise been achieved over the last year. While no single factor can be said to be the cause of the recent remarkable expansion of world trade, there can be no doubt that the progressive removal of restrictions and discrimination has played a considerable role, to the great benefit of all countries. This progress has included the liquidation of a considerable number of biliateral payments agreements. However, many such agreements remain, and to this extent there are still appreciable limitations on the ability of traders to sell and buy freely in markets where they can find the most advantageous terms. The Fund will, of course, continue to work for the establishment of a world-wide system of multilateral trade and payments. In a number of countries, the system of restrictions reflects a position of domestic instability and consequent distortions, or is maintained because of strong protectionist pressures, but there is fortunately a growing awareness of the fact that restrictions and discriminations are harmful not only to other countries, but even more to the countries which continue to apply them.

The examination of the legal, policy, and procedural aspects connected with a member’s acceptance of the obligations of Article VIII was also begun after the last Annual Meeting, and on June 1 the Executive Directors agreed upon a decision intended to serve as a guide to members in pursuance of the purposes of the Fund as set forth in Article I of the Fund Agreement.

Under the transitional arrangements of Article XIV, members are entitled to maintain and adapt restrictions on payments and transfers for current international transactions without the prior approval of the Fund. When, on the other hand, a country accepts the obligations of Article VIII, it has to obtain the approval of the Fund for any restrictions on such payments that it is maintaining at that time; and for the future it must obtain the prior approval of the Fund both for the introduction or reintroduction of restrictions and for any adaptation of existing restrictions.

It is perhaps useful to stress that under Article XIV, countries have only the right to maintain and adapt restrictions; therefore an introduction or reintroduction of restrictions would already require the prior approval of the Fund under Article VIII, even though the country concerned has the status of Article XIV. From a more general point of view, the acceptance of all the obligations of Article VIII can be considered as the consolidation of the attainment of convertibility for current international transactions; it implies that the country making the move feels able to conduct its international financial relations without any significant use of restrictions. Therefore, for countries that have remaining restrictions of only limited scope, and that are not likely to need to resort to restrictive measures in the foreseeable future, the transition to Article VIII would seem now to be an appropriate step. Several countries have been carefully considering such a step, and at the Fund’s request have provided detailed and comprehensive information on their exchange systems. It is therefore to be expected that several member countries will move to Article VIII in the near future.

An important feature of the decision of the Executive Directors of June 1 was to outline the methods of regular consultation with the Fund as more and more countries assume the obligations of Article VIII. The question is important because regular consultations are not mandatory for Article VIII countries except in certain limited circumstances. The Executive Directors emphasized that the Fund is able to provide technical facilities and advice to member countries, and can provide a forum for the exchange of views on monetary and financial developments; they considered that there is great merit in periodic discussions between the Fund and its members—even though no questions arise involving action under Article VIII. The Executive Directors concluded that such discussions would be planned between the Fund and the member, including agreement on place and timing, and would ordinarily be held at intervals of about a year.

The method thus outlined for Fund contact with its members means that, in addition to the annual consultations with Article XIV countries, arrangements will in the future be made for periodic discussions with countries under Article VIII. By the voluntary acceptance of a practice that has proved so useful for both the Fund and many member countries, the Fund should be able to maintain and strengthen its bonds of contact with members and, in general, to increase its effectiveness as a center for monetary cooperation.

The principles or lines of guidance laid down in the two policy statements which have been made by the Executive Directors since the last Annual Meeting now form part of the code of good monetary and economic behavior which is gradually being evolved and adhered to by the members of the Fund.

Turning to another matter, I want to refer to the study prepared by the Fund in response to a request from the seven countries which formed the Latin American Free Trade Association with the signing of the Treaty of Montevideo on February 18, 1960. The Fund was asked to prepare a study of the payments problems which might arise within the Association. In the study, stress was laid on the great advantages of a system of settlement in freely convertible currencies. At a meeting of Central Bankers of the seven countries, it was reaffirmed that the principle of free convertibility of currencies is the objective to be attained. It is therefore to be hoped that the Latin American countries concerned will regard convertibility of currencies as a condition for the successful implementation of their trading arrangements.

In the field of international monetary and commercial relations, many new organizations and institutions are being formed all over the world. In a period of rapid economic development, new institutions are certainly sometimes needed, and I would particularly like to extend a special greeting of good wishes to the newly formed Inter-American Development Bank whose first President, Mr. Herrera, was formerly an Executive Director of the Fund.

It is, however, becoming more generally realized that a multiplication of international organizations and institutions cannot provide a panacea for all our problems, and I am reminded of an old principle of logic, dating from the Middle Ages and known, after the English philosopher, as Occam’s razor: “Entities should not be multiplied beyond necessity.”

As we look over other developments, it is clear that the establishment of external convertibility has given new vigor to the working of the world’s exchange markets and to the international banking system. It is not only that nonresident holdings of the currencies of most industrial countries are now fully convertible, but also that the commercial banks themselves have more substantial foreign funds with which to operate. Partly as a result of this increased freedom, the financing of trade has been greatly facilitated, and this has certainly been one of the factors behind the expansion of world trade. At the same time, the changes have made possible the shifting of available liquid funds or the movement of trade financing from one money market to another in response to changes in relative interest rates. During the course of this year, reflecting mainly domestic developments, short-term rates in the United States and Canada have fallen by about 2 per cent, while in Germany and the United Kingdom they have risen by some 2 per cent. A change of as much as 4 per cent per annum in the relative advantage of keeping money or financing trading operations on one side of the Atlantic rather than the other has naturally induced many business enterprises and financial institutions to review their positions in the different centers and to make adjustments in the light of the new situation. The intensification of other restraints on the availability of credit in some European countries, especially in Germany, has added to the flow of funds. On the other hand, only relatively limited movements of funds seem to have resulted from political considerations.

Movements of funds have also been due to surpluses and deficits on the current account of the balance of payments. Indeed, it is important not to lose sight of the fact that fundamental developments on the current account reflect the basic earning position of the countries concerned.

As far as the more fundamental balance of payments position of the major trading countries is concerned, the most striking change has taken place in the United States. After a substantial surplus in 1957, the United States had a balance of payments deficit of about $3½ billion in both 1958 and 1959. This deterioration was due to a combination of factors; on the one hand, the increased competitive power of the other industrial countries in world markets; and, on the other, the budget deficit and the increase in the credit volume in the United States during the 1958 recession. Once, however, the recession was over, U.S. fiscal and credit positions were reversed. The 1959-60 budget had a surplus of $1 billion; and for over a year the money supply has been kept steady. The rise in prices seems to have been arrested, and more attention is being paid to costs. In the foreign sector, exports started to rise in the autumn of 1959, partly as a result of the boom conditions in the countries of Western Europe, which so far this year have increased their purchases of U.S. goods by over 50 per cent, compared with the same period of last year. There is now a substantial trade surplus, which for the whole of 1960 may exceed $4 billion, and which, with net income from investments and other invisible receipts, may well amount to $6 billion. Compared with last year, this would represent an improvement of over $3 billion, and would be sufficient to cover fully the present rate of U.S. Government expenditure abroad, including military expenditure and economic grants and loans.

This will still mean, however, that the outflow of short-term funds and the export of long-term capital on private account will have to be met by an increase in dollar liabilities or by sales of gold—which, incidentally, seem to excite public opinion far more than the fundamental condition of the balance of payments. Nevertheless, these movements—and the same is true of government loans—have as their counterpart the acquisition of foreign assets and in this way are somewhat different from an outflow of funds resulting from a deficit on current account. However, it must be borne in mind that the improvement which has occurred on the U.S. current account this year, while it is basically an important development, results from some special factors, particularly the strong boom in other industrial countries. It is, therefore, too early to conclude that the U.S. payments difficulties have been fully overcome, and continued vigilance is required.

It is interesting to note that the Fund’s operations have recently made some contribution to the dollar position. During the last 1½ years, repurchases in U.S. dollars have amounted to nearly $700 million, while dollar drawings were only $200 million. As a result, other countries have transferred about $500 million net in U.S. dollars to the Fund, and the rate of increase in their dollar balances and gold holdings has been slowed down accordingly. The dollars received by the Fund have been returned, under the Fund’s rules, to the U.S. Treasury against the issue of noninterest-bearing demand notes to the Fund. During the coming year it is expected that repayments will continue to be made mostly in U.S. dollars, and that the proportion of other currencies drawn from the Fund will increase.

The main counterparts of the payments deficits of the United States in 1958 and 1959 were large surpluses in a number of European countries. It is not yet possible so far this year to obtain a clear picture of the basic payments developments in Europe; they have partly been obscured by movements of short-term funds. But, broadly speaking, it would seem that the tendency toward balance in the foreign account of the United States has been matched by declining surpluses in Europe.

Germany, which for several reasons has had the largest inflow of funds from abroad, poses a number of problems. The German authorities have introduced some special inducements for the maintenance of short-term funds abroad, and the Bundesbank has recently granted a loan of the equivalent of $240 million to the International Bank for Reconstruction and Development. At the same time, the Bundesbank has not, to any appreciable extent, converted its substantially increased dollar holdings into gold. These steps have been useful as far as they go, but what gives rise to concern is Germany’s particularly large surplus on current account, which has averaged $1.3 billion per annum over the last three years. The question has in particular been asked whether there are corrective forces effectively at work in the present German situation. No doubt, German foreign trade is in a strong position during a period when investment goods are greatly in demand in world markets, and when, nevertheless, the prices of imported raw materials have not risen. There are, it is true, some signs of an adjustment taking place. In Germany, wage contracts negotiated in a number of important industries in July this year have incorporated a rise in wages averaging 8½ per cent, in addition to a shortening of the working week; and the note circulation has been increasing at about the same rate. Moreover, in the first seven months of 1960, imports increased by 25 per cent, compared with the same period of the previous year, while exports rose by 21 per cent. These tendencies are likely to continue and could be reinforced by further efforts to facilitate German imports. But it should not be overlooked that Germany needs a substantial surplus on current account to sustain what could be regarded as the desirable level of German capital exports. With boom conditions in Germany continuing, the high level of interest rates acts as a deterrent to private capital exports. It will, therefore, be a matter for the German authorities, assisted perhaps by private industrial and banking groups, to arrange the internal finance needed to make increased funds available to other countries by capital exports, or in other ways. This would minimize the danger of increased strain and nervousness and ensure further German participation in the provision of capital for less developed countries.

It is important that we should not allow our thinking to be dominated by the movements of short-term capital, overwhelming as they may seem to be over a short period. The field over which realistic exchange rates prevail has been widening; and more effective support can now be provided, if need be, by increased reserves in many countries, and generally by more substantial assistance from the Fund following last year’s increase in quotas. Such assistance is given for a variety of reasons, and should of course not be regarded as available merely in emergencies. We have, therefore, reasons to expect that, by and large, the present exchange structure will continue to gain in strength and cohesion.

Some of us present here today will remember that the replenishment of monetary reserves was a problem after World War I, when no really satisfactory solution was reached. The same problem has had to be faced again after World War II—aggravated by the decline in reserves that occurred in the years immediately following the War. But since then, we have been more successful, partly because of the funds made available by the United States. The Western European industrial countries and Japan now possess gold and foreign exchange reserves amounting to $24 billion, compared with $8 billion at the end of 1947. Over the same period, however, the aggregate official reserves of the less developed countries actually declined. In the light of these changes, I think it is appropriate to make some observations on the subject of the adequacy of reserves.

Many attempts have been made in the past to define what should be regarded as an adequate level of reserves; and in view of the great diversity of tradition and policy in different countries, it is hardly possible to give a simple answer to the question. It is possible, however, to indicate in a few words what might be regarded as an ideal state of affairs: a country should have reserves large enough to give it a sufficient margin for the pursuit of its domestic economic and financial policies, but not so large as to free it from the necessity of having to observe a modicum of monetary discipline.

I think that individual countries, as individual business firms, can have liquid reserves which are too large. I remember that in my own country, Sweden, after World War I, there were some firms with such large reserves that in the postwar crisis they were able to postpone any adjustment of their affairs when the business situation became more difficult; other firms with smaller reserves, which were obliged to make the required adjustments more quickly, as a rule fared better in the long run. For a country, however, the magnitude of the reserves that are needed will in fact depend very much on what policies are pursued, and those countries which wisely adjust their policies to changing situations can do with smaller reserves. This is, of course, not a new experience, for, to quote from the Book of Proverbs, “How much better it is to have wisdom than gold, and knowledge is rather to be chosen than silver.” It is, of course, preferable to have both wisdom and sufficient reserves, but without wisdom and proper policies, no level of reserves will suffice.

It is my belief that the majority of the larger industrial countries, which exert the more decisive influence on the trend of world affairs, have adequate, or very nearly adequate, reserves. This, of course, presupposes that these countries will succeed, as I believe they can succeed, through their individual efforts and concerted policies, in preventing any marked tendency toward either inflation or deflation at home, and in the world price level generally. Such replenishment of reserves as may still be needed by countries in this group can be met, I think, without difficulty from current supplies of newly mined gold and a moderate expansion of foreign exchange liabilities.

If thus the true purpose of reserves is to allow proper domestic policies to be pursued, with changes in reserves giving useful warning signals, there arises the question of what are the proper domestic policies to pursue. Probably the most simple answer is that the policies should be designed to help to create conditions under which there can be sustained domestic expansion. With this purpose in view, a number of countries have declared that such credit measures as they have recently taken have been determined “predominantly by domestic considerations.” In some countries the measures taken involved credit restraint to prevent excesses in a boom, in others, the introduction of greater ease to promote activity in a period of slacker business. But “predominantly” must clearly be taken to mean that other considerations have not been forgotten; it would indeed be short-sighted to neglect them, even in relation to the main domestic purpose of sustained expansion. If, in an attempt to raise activity by credit and fiscal policies, inflationary pressures are set up, the resulting cost and price increases and weakness in the external balance may soon create conditions under which economic expansion could not be maintained. Conversely, persistent strength on foreign account and the building up of unnecessary reserves may easily involve a misuse of a country’s resources, for which a better employment could be found.

As I have already mentioned in connection with the current situation, special difficulties may arise from sudden shifts in commercial financing, or, more generally, from an outflow of short-term funds. In ordinary times, therefore, reserves should also be sufficient to make it possible for countries to take such changes in their stride. And in this connection, the second line of reserves available to countries through the Fund remains an important factor.

In considering problems of the less industrialized countries, it is interesting to note that some of them—notably Argentina, Colombia, Israel, Malaya, Morocco, Peru, and the Sudan—have succeeded in increasing their gold and foreign exchange reserves quite considerably over the last year. But for the general run of these countries, the picture is different. For many of them, reserves are clearly on the low side—and in some cases embarrassingly low. Measures taken to strengthen their reserve positions would without doubt be of great advantage to them. It will generally be impossible to achieve any spectacular increase, but a more or less regular addition to reserves would have beneficial effects both internally and externally. Such an increase, by deliberate policy, would provide an increasingly reliable basis for the accumulation of savings and for economic growth, and would help to improve the country’s creditworthiness abroad, especially if a policy of fair treatment for foreign investments is pursued.

An increase in reserves, however, is a type of investment for which genuine savings, from domestic or foreign sources, are required, and if those savings are used to accumulate foreign reserves they cannot be used for other investments, in plant or equipment, houses, harbors, or roads, in the domestic economy. Usually a replenishment of reserves requires a moderation in internal spending, and often a temporary slowing down in the rate of growth. This usually presents certain difficulties for the less developed countries, devoted as they are to the promotion of investment; as a result, few resources are as a rule made available by them for the replenishment of their reserves. In those countries where investment plans are drawn up for some years to come, it is therefore particularly important that due weight should be given to the requirements of the reserve position, and that resources should be set aside for the building up of reserves as one of the objectives of the plan.

Most of the Fund’s stand-by arrangements during recent years have been with the less industrialized countries. The Fund is sympathetically aware of the difficulties which these countries are encountering, and well aware of the efforts which they are increasingly making to arrest inflation and establish realistic rates of exchange. One after another, these countries have come to appreciate the overriding need for establishing monetary order and stability. In the early stages of a country’s development, it may not at first sight seem to matter enormously whether or not the right priorities are chosen, since so much has to be done; but countries whose resources are limited cannot afford the distortions and misuse of capital which will be unavoidable if there is no proper basis for cost accounting, and thus for judging the best employment of scarce resources. The achievement of stability is, however, no easy matter. It requires as a rule that budget expenditure has to be curtailed and revenue increased, and a policy of restraint applied to the credit structure. Moreover, it has been the experience of many countries that, after years of continuously rising prices, the conditions for more normal, noninflationary business activity cannot be established all at once or without transitional difficulties and delays. There will usually be a period of uncertainty and hesitancy while businessmen and the general public get used to the idea of more stable prices. But once that intervening period is past, stable money will provide a reliable basis for a more enduring rate of growth, to which, fortunately, the experience of many countries now bears witness.

Although the International Monetary Fund does not provide capital for development, the technical and financial assistance which it can give to member countries to overcome monetary difficulties helps to ensure that development plans are worked out within the framework of financial stability. By thus avoiding a misuse of resources and by creating an atmosphere of general confidence, agreements with the Fund on stabilization programs have helped countries to obtain financial assistance from other sources. On numerous occasions, various government and intergovernmental agencies and commercial banks have provided assistance at the same time as the Fund to support the stabilization program under so-called “parallel arrangements.” Then, as the stabilization effort has begun to show signs of success, and monetary stability has helped to open up increased possibilities for ordinary commercial bank credit and for direct long-term investment, further resources have become available from abroad for development and economic expansion. The developing countries need genuine savings; and they must therefore seek to create conditions under which such savings are effectively mobilized within their own economies and attracted from abroad. They must also see to it that such resources—whether domestic or foreign—are put to the best possible use. If financial stability is achieved and if resources are properly used, the richer countries have greater incentive to give assistance to the less developed countries. But the richer countries themselves must ensure that their assistance is provided regularly, and not piecemeal, and under conditions that permit realistic planning.

One of the particular problems facing the less developed countries has been the general weakness of the prices of many of their main export products. The Fund was therefore asked by the UN Commission on International Commodity Trade to present a study of its policies and procedures in relation to the compensatory financing of commodity fluctuations, and in this study the Fund made it clear in what circumstances it would be able to assist countries in overcoming temporary payments difficulties arising from fluctuations in the prices of export products. Such assistance may undoubtedly be valuable, but it cannot in itself affect earning possibilities, as determined by the relation of demand and supply in world markets. A possible solution has been sought in international commodity agreements that involve among other measures the limitation of supplies. This may be feasible for some—though certainly not for all—commodities. But in the long run the only really effective influence on market prices will come from a high and rising level of activity in both the industrial and the less developed countries. For certain commodities in particular, this increase in demand could be encouraged by a lowering of obstacles to international trade and a reduction in demand-depressing excise levies. While the industrial countries have obviously a predominant role to play in encouraging demand, attention should also be paid to the possibilities of increased trade between the less developed countries themselves, which is often hampered by self-defeating import restrictions.

For many of the primary producing countries, one of the main hopes lies in the diversification of production. Here, of course, capital and technical knowledge are needed, and in this respect the richer countries should be able to make an even greater contribution. It is not as if little or nothing has been done to promote diversification, but more can be achieved; and a quickening of the pace will surely be dependent upon the degree of confidence and cooperation that can be established between the developed and the less developed countries, and the creation of conditions which are likely to ensure a rational disposition of production and to improve the facilities for technical and administrative training.

From time to time it is necessary to take a new look at the general economic situation, either because things have turned worse or because they have improved. This time I suggest we should do so because in some essential respects there has been a substantial improvement, and at least some of the problems with which we struggled for years are now well under way to a more definite solution. In particular, I have in mind the establishment of external convertibility for many currencies, and the more convincing signs of greater price stability. These developments, of course, reflect a fundamental improvement in the world situation.

In this new situation there are certain fears which, however natural in view of past experiences, can today be easily exaggerated. In those countries which fear most of all the threat of inflation, the authorities and people can now, it seems, be assured that by the maintenance of a stable exchange rate they will not expose themselves to “imported inflation.” Also fully understandable, in the light of the bitter experiences of the past, is the fear of heavy unemployment. However, in these postwar years employment has, by and large, been at a high level, and there are many stabilizing factors which now help to ensure that employment will be kept up. Nevertheless, with a more stable world price level, it is important to remember that too high a level of costs and prices will tend to limit the volume of sales and production, and thus cause unemployment.

In the private sector, now exposed to more intense competition with the halt to continuously rising prices, the need to pay more attention to costs must be part of the day’s work. There may be a danger of more persistent demands for increased protection, but to accede to these demands would reduce the impetus toward highly desirable and necessary adjustments, and would also impair the expansion of world trade. The Contracting Parties to the GATT are at present meeting in Geneva to negotiate tariff reductions. It is sincerely to be hoped that at this meeting, and in the future, as much progress as possible will be made in dismantling obstacles to trade.

It has been said that it is a good thing for each generation to be faced with an important challenge. We may well think that our generation has had to face more numerous challenges than it could readily meet. But we have certainly proceeded with much determination and success in our efforts to achieve international cohesion and progress in the economic and financial field. It is no mean achievement to have almost doubled in a decade the volume of world trade, and to have established an effective international payments and credit system based on convertible currencies; and I believe we are entitled to think that at least some of the challenges have been met. Although we are still confronted with many important and difficult problems, especially in relation to the less developed countries, our resources are more ample and our methods of cooperation more developed, and there are good reasons to expect that these problems will be solved through continued individual efforts and effective international cooperation.

September 26, 1960.

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