Chapter

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

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1959
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Author(s)
Per Jacobsson

The enlargement of the Fund’s resources, which was proposed last year in New Delhi, became effective two weeks ago, when countries having over 75 per cent of total quotas had consented to the increases in their quotas. As a result of further consents received since then, I am glad to announce that the proportion has now reached the figure of 83.56 per cent of total quotas. The Executive Board has extended the date of consent for increases in individual quotas to July 31, 1960, to permit countries which for constitutional or other reasons had not given their consent before September 15, 1959 to do so.

As a result of these steps, the Fund’s total resources are being increased from the equivalent of about $9 billion to about $15 billion. Until very recently, the Fund’s effective liquidity was generally judged by the relation between its holdings of gold and dollars and the possible demands upon its resources. After the improvements in the monetary field in the last few years, which were so signally expressed by the concerted move to external convertibility by so many countries at the end of last year, the effective liquidity of the Fund has been substantially strengthened. While up to the end of 1957 no less than 92 per cent of all drawings from the Fund were made in U.S. dollars, about one quarter of all subsequent drawings have been made in other currencies. With the establishment of external convertibility, we may expect this trend toward a wider use of currencies to be strengthened. Indeed, in one recent substantial drawing one half of the amount was drawn in sterling and French francs.

However, the purpose of the increase in the Fund’s quotas has not been primarily to provide additional resources for current operations in the short run. There has been no evidence of any immediate shortage of international liquidity; indeed, the recent strengthening of monetary stability may even reduce demands on the Fund in the period immediately ahead. The purpose of the increase was rather to give members confidence that in the Fund they have an effective second line of reserves, particularly in cases of emergency when, in a relatively short period, there may be substantial calls upon the Fund. Let me here recall that in an emergency as acute as the Suez crisis, use of the Fund’s resources, together with appropriate national financial measures, made it possible to avoid a disruption of the exchange structure without having to resort to any intensification of import restrictions or of other physical controls. The Fund was thus able to fulfill one of the purposes set out in Article I of its Articles of Agreement, namely, to provide member countries “with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” In spite of the crisis in the autumn of 1956, world trade and production continued to expand in 1957.

The introduction of external convertibility, to which I have just referred, may be regarded as the consummation of the first stage of a process extending over many years for strengthening the economic and financial position of countries all over the world. The monetary disturbances which were brought about by the Second World War could not be easily overcome; but through increases in national income and the more effective application of flexible fiscal and credit policies, the excessive liquidity which weighed on many economies in the postwar years has gradually been worked off, so that by now the authorities in many countries have got a firm grip on the monetary position. Though the time was undoubtedly ripe, and the circumstances propitious, for a concerted move to convertibility, the decisive steps themselves needed, as always, imagination and courage, and also a readiness to cooperate. The move can now be seen to have been fully justified by the quite remarkable rise in the monetary reserves of most of the countries concerned. In Western Europe, monetary confidence has been increasing conspicuously, not only as regards the external value of the currencies, reflected in the firmness of the exchange quotations, but also in regard to the internal value, for the good and simple reason that neither wholesale prices nor living costs have risen appreciably in most of these countries for a year or two.

The convertibility move has resulted in a greater freedom from exchange regulations, and it is important to remember that this means at the same time a reduction in costs. An interesting concrete example of such a reduction was recently given to me by a Swiss banker. He told me that any loss in profits from the reduced volume of exchange transactions, resulting from a shift of exchange dealings to London, had been more than compensated by the reduced costs of handling other foreign business (transfer of funds, cashing of coupons, etc.), made possible by the steady reduction of paper work involved in exchange controls. In a broader, and much more important, sense, the very fact that business firms can count on stable exchange relations over an increasingly wide field means that less provision on account of exchange risks has to be made in the prices charged for commodities, and in the valuations placed on foreign investments. Wherever monetary uncertainty exists, businessmen are forced to spend a good part of their time in considering exchange questions—time which ought to be spent on their proper business of producing and selling their goods. Restoration of monetary confidence thus results in reduced costs, a reduction which in competitive markets will ultimately be passed on to consumers. In this and in other ways it will contribute to the expansion of world trade and, indeed, facilitate foreign investments. Let us not forget that the virtual stagnation of world trade in the 1930’s was undoubtedly aggravated by the monetary uncertainty which was a feature of that decade. These are market developments, but they will tend to be reinforced by the changes in public policy which should follow from the move to external convertibility.

The European Payments Union, for eight and a half years up to the end of 1958, made a most useful contribution to progress in Europe by assuring prompt payments and by giving an impetus to the relaxation of trade restrictions. The participating countries extended credits to each other for part of the net payments due to them; consequently, they did not receive in gold or convertible currencies the full value of whatever balance of payments surplus they acquired inside the Union. They were, therefore, not able to apply the full value of surpluses within the Union to meet deficits with other areas; this was of particular importance in relation to the dollar area, and, indeed, was one of the reasons given for the retention of discrimination against dollar goods. But now that, in Europe and elsewhere, exchange receipts are, with relatively few exceptions, obtainable wholly in convertible currencies, this particular difficulty has disappeared. In matters of international trade, the distinction between “hard” and “soft” currency countries has really become an anachronism. The traditional argument for continued discrimination has thus, by and large, been eliminated.

There is, however, the further question whether a sudden elimination of discrimination would lead to such an increase in the imports of, say, dollar goods, that balance of payments equilibrium might be impaired. Fears of that kind are not really borne out by the experience of those European countries which have substantially reduced the degree of discrimination. But even suppose that there should be a certain temporary increase in imports, it might well be asked whether such an increase could not be sustained by countries whose reserves in gold and convertible currencies are steadily increasing. And even for other countries, once their exchange receipts are largely in convertible currencies, the extension to their importers of the right to buy in the cheapest market can hardly be said to be likely to impair their balance of payments. The essence of the problem of the remaining discriminatory restrictions, which have modified the pattern of trade, is that they are now more clearly seen to be protectionist devices; and it is likely that for this reason there will be resistance to their removal. They thus become a problem of commercial policy and are no longer to be considered a balance of payments problem. The general trend of commercial policy has certainly a monetary significance; the maintenance of discrimination, moreover, undoubtedly acts as a strong irritant, liable to bedevil commercial relations; it may provoke a resurgence of protectionist sentiment, especially when the business trend turns downward; and if such possibilities are not guarded against, the result might well be a dangerous disruption of trade relations in general. The time has clearly come when, for many reasons, the practice of discrimination should be abandoned with the least possible delay. It is my personal conviction that for the vast majority of countries there are no longer any balance of payments reasons for the maintenance of discrimination.

So far, I have referred to the particular problem of discrimination. With regard to the general level of restrictions, whether discriminatory or not, the Fund has certain duties in relation to the Contracting Parties to the General Agreement on Tariffs and Trade (GATT). The Fund has already had occasion to conclude that restrictions maintained by a member country were not justified on balance of payments grounds. In view of such a finding, the Contracting Parties have in turn applied their procedures in dealing with the quantitative restrictions maintained by the individual country concerned. The Fund has a role in making findings concerning these matters whether or not the country in question remains under the regime of Article XIV of the Fund Agreement.

This leads me to say a few words about another important question, namely, the problems arising in connection with the move of countries from the status of Article XIV to that of Article VIII. When the Fund was set up, it was felt that a transitional period would be needed before the member countries gravely affected by the war would be able to implement the full obligations under the Fund Agreement. To that end, the “transitional arrangements” under Article XIV were designed to give these member countries time to overcome their balance of payments difficulties before they were required to eliminate their existing exchange restrictions. Under this Article, many member countries have been free from any obligation to obtain the approval of the Fund for the maintenance and adaptation of their existing restrictions on payments and transfers for current international transactions. Instead, since 1952, these countries have had annual consultations with the Fund on the need for retaining those restrictions. In these consultations, which are commonly referred to as Article XIV consultations, the continued need for remaining restrictions has been carefully scrutinized, and, in addition, much attention has been devoted to exploring ways and means of overcoming existing weaknesses and achieving external equilibrium.

Over the last few years, much progress has been made in the removal of restrictions; as this has continued, the scope for adapting restrictions under Article XIV has steadily diminished for a number of countries that have gradually reached a position where Legally the reintroduction of restrictions (as distinct from the adaptation of existing restrictions) would require approval under Article VIII, even though the countries themselves remained formally under Article XIV.

The formal assumption of the full obligations of Article VIII would mean that such a country was willing to accept the requirements that it seek the approval of the Fund for any remaining exchange restrictions, and the prior approval of the Fund for the adaptation of any such restrictions or for the introduction of new restrictions, if this should ever become necessary.

Several times in the past the question of the relationship between Article VIII and Article XIV has been considered by the Fund, but so far immediate action has seemed premature. Now, with the adoption of external convertibility, a number of countries which have swept away most, if not all of their payments restrictions will have seriously to consider, as a practical proposition, the question of a formal transfer to Article VIII. Both the studies made in the past and the attention recently given to these problems in the Fund, and also in a number of member countries, have shown that several issues arise which need clarification, and it is important that before any definite action is taken the Fund and its members should have a clear idea of what is involved.

In any examination of this question it will be necessary to consider which members are in a position to assume the full obligations of Article VIII; what should be the procedure and rules for expressing the Fund’s views on any remaining exchange restrictions, and on any request for the introduction of new exchange restrictions; how regular contact can best be maintained with countries which are under Article VIII, and which, therefore, are not required to participate in the annual Article XIV consultations. In addition, the change in status of a number of Fund member countries would bring into force the revised GATT provisions dealing with discrimination. These questions require careful examination in all their aspects and will be taken up by the Executive Directors in the very near future.

It is all to the good that the Fund should from time to time review its essential tasks and the most appropriate methods for its work, in the light of the changing circumstances under which it has to operate. Such a review may be particularly useful when it is combined with the search for practical solutions to current problems—in this case, the change of status from Article XIV to Article VIII. As over the years to come more and more countries are able to conform to the full requirements of Article VIII, there is bound to be a shift in the main preoccupations of the Fund and in its daily work. There will still be a need for financial assistance even for countries under Article VIII, since difficulties, often of an unexpected nature, are likely to arise in the future, as in the past; but the day will come when fewer countries will turn to the Fund with requests for assistance in the elaboration and implementation of comprehensive stabilization programs. This is not to say that the Fund’s work will then be made any easier—perhaps rather the contrary. In dealing with a stabilization program, it is usually not difficult to tell what measures need to be taken—balance the budget, restrain credit, and establish a realistic exchange rate. The difficulties usually arise when the program is put into effect. I am often reminded of Napoleon’s famous saying, “la stratégie économique est un art simple, tout d’éxécution.” For the successful implementation of a stabilization program there are needed, above all, conviction, character, and courage.

When stabilization has been achieved by a considerable number of countries, the problems that arise, some old, some new, are likely to be intricate, as regards both economic diagnosis and the finding of proper remedies. How to mitigate booms and depressions; how best to combine economic expansion with reasonable stability; how to ensure proper debt management; how to alleviate, through timely foreign financing, the strain in the balance of payments of countries engaged in development; how to deal with the difficulties which arise when the prices of a country’s main exports are declining—these are all matters which require great economic insight, and awareness of political factors. These problems fall under Article I of the Fund Agreement, which affirms that the Fund, while promoting exchange stability, also has, among other things, “to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.” These should not be empty words. Now that the transitional period after the war draws to its close, more attention should be paid to these general objectives of the Fund. Since the decisive measures are generally those taken by the authorities in the individual countries, such influence as the Fund can exert will largely depend on the confidence it is able to inspire as an expert body always ready to consider on their merits the problems that arise and to find solutions which are in the true interests of the member countries.

But I am anticipating; let me now turn to the problems the Fund has encountered during the year that has passed since our last Annual Meeting. Drawings on the Fund have not been at the high level of the two previous difficult years, but ten countries have nevertheless drawn on the Fund for a total of about $140 million. Most of these were primary producing countries. Some of these drawings were made under stand-by arrangements, of which nine with total open balances of $1,031 million are in effect at the present moment. Repayments to the Fund during the same period reached the record level of about $435 million, reflecting in large part the improvement in the reserve positions of industrial countries. This story of Fund transactions emphasizes once again the truly revolving nature of its resources.

Through annual consultations under Article XIV, and in other ways, the Fund has continued to maintain contact with its member countries. Close relations have naturally been maintained with those countries which are implementing stabilization programs supported by stand-by arrangements with the Fund. Notwithstanding the difficulties experienced by several of these countries because of low prices for their export products, and for other reasons, they have generally shown great courage in pursuing domestic policies consistent with the aims of their stabilization programs.

Since the last Annual Meeting, the Fund has been associated with three countries that have embarked during the year upon stabilization efforts. In December 1958, the Argentine Government adopted a comprehensive program supported by a $75 million stand-by arrangement with the Fund, and exchange and balance of payments credits, totaling $128.5 million, from other sources (the U.S. Treasury, the Export-Import Bank, and U.S. commercial banks). In addition, development loans amounting to $125 million were granted by the Export-Import Bank and the U.S. Development Loan Fund. Several other countries which have put stabilization programs into effect with assistance from the Fund had already for several years experienced rapid economic expansion, and the authorities were then faced mainly with the problem of ensuring financial stability. That, for instance, was the case in France. In Argentina, on the other hand, the economy had been stagnant for many years, and the whole problem of rehabilitation was made correspondingly more difficult. But the Argentine authorities are now pursuing new lines of policy, and their efforts seem to be receiving increasing support as the public gradually gains a better understanding of the real needs of the country.

Mexico, which has a convertible currency, has maintained a stable rate for the peso since April 1954. Early this year, in order to strengthen the country’s position, and especially to maintain confidence in the currency in the face of some speculative pressure, the Government decided to take a series of new budgetary and credit measures. To support this program, the Fund made available $90 million in the form of a six-month stand-by arrangement, and at the same time the Export-Import Bank extended a credit of $100 million. Mexico also maintained a $75 million stabilization agreement with the U.S. Treasury. In March, a drawing of $22.5 million was made under the standby arrangement with the Fund, but soon after the program was announced capital began to return to Mexico, and monetary reserves have since been rising. The improvement in Mexico’s position is reflected in the repurchase two weeks ago of the drawing made in March.

In July 1959, Spain presented to the Fund and to the Organization for European Economic Cooperation (OEEC) a comprehensive stabilization program, which included budgetary reform, credit restraint, and unification of the exchange structure at a realistic rate, together with measures for the liberalization of trade. In support of this program, Spain drew $50 million from the Fund and entered into a stand-by arrangement for $25 million; at the same time, Spain became a member of the OEEC and was granted a credit of $100 million by the European Fund. Furthermore, about $200 million was obtained from various U.S. sources (including about $70 million from U.S. commercial banks). Important steps have already been taken to put the program into effect. These, and the steps still to come, are likely to have a considerable impact; the elimination of inflationary pressures and the greater freedom of trade and payments, reinforced by a reduction in discrimination, represent a marked shift in Spanish policy, aligning the Spanish economy with the economies of other countries in the Western world.

Once again the Fund has been happy to cooperate with the OEEC, which is able by virtue of its special knowledge and connections to advance the solution of problems of countries in its area. May I recall that, just before the last Annual Meeting, the Fund and the OEEC cooperated in the case of a stabilization program for Turkey. Close relations have been maintained between the Fund and Turkey throughout the year: Fund officials have visited Ankara and Turkish officials have been received in Washington. I am glad to report that, in the year that has passed since the initiation of the Turkish program, substantial progress has been made toward the creation of an environment which should permit the healthy growth of the Turkish economy under conditions of stability.

It is of course understood that when financial assistance is given to a country by several organizations, under so-called “parallel arrangements,” each must form its own judgment of the adequacy of the stabilization program proposed by the country concerned, and each organization must itself determine what credit facilities it is willing to extend.

At this point, I should like to make a few general observations on the problems which arise when efforts are made to restore balance in an overstrained economy. Whatever external resources are obtained, the implementation of a stabilization program designed to eliminate inflation will almost inevitably be followed by a period in which certain hardships are experienced, and the rate of economic expansion somewhat reduced. These difficulties should, however, be set against the background of the methods employed to sustain the preceding expansion which, nourished by inflation, will often have been of a distorted character.

Among these methods I would mention, in the first place, the “forced savings” which usually become available for a time in the early stages of an inflationary period. So long as increases in wages lag behind the rise in prices and the public is willing to hold a more or less normal amount of cash, newly issued money may provide a basis for industrial and other investment. However, once people wake up to the hurt inflicted upon them by the inflation, they will demand increased wages sooner than before (and often insist on index-tied wages), and they will also hasten to buy whatever they can to avoid loss of real earnings. When that happens, not only will the “forced savings” disappear, but the normal flow of voluntary savings will also be diminished and be increasingly diverted to speculation in real estate and other ventures. Then the game is up, for without a ready flow of savings no economic progress can be sustained.

Temporary resources have also been obtained in the form of so-called “suppliers’ credits” from abroad, maturing within three, five, or seven years. As the maturities fall due, however, the strain on the balance of payments and on the reserves has often been so acute that critical situations have arisen. There is a limit to the extent to which countries can borrow short and invest long, and this limit is soon reached. Moreover, when the limit is reached, exporters to such a country begin to demand prepayment. Thus a situation is created in which a country, itself very much in need of capital, not only obtains no further credit but may even be forced to extend what amounts to credit to traders in other countries.

A third method of obtaining temporary resources is to make use of monetary reserves. Several countries which, during the Second World War or the Korean crisis, accumulated larger reserves than they had before, embarked upon a policy of development by drawing down reserves; but there again they had to be careful not to push this policy so far that reserves became inadequate, and monetary confidence was thereby impaired.

These three methods clearly do not provide a durable basis for sustained growth; and, worse than that, reliance on them is bound sooner or later, and often sooner rather than later, to result in a monetary crisis. In recent years, there have been many instances of such crises in both industrial and nonindustrial countries, in some cases aggravated by additional factors, such as an excess of liquidity inherited from the war, sometimes involving large claims in foreign hands. Whatever the cause of any particular crisis, there have generally been signs of inflationary tendencies, accompanied by a loss of reserves. Since a repetition of crises is an intolerable state of affairs, steps have before long to be taken to put a stop to an unbalanced position and to restore confidence. As a rule, these steps have been taken with the immediate purpose of replenishing monetary reserves, a process which requires part of the savings of the country concerned to be invested in additions to reserves—savings which cannot therefore, for the time being, be invested in bricks and mortar, machinery, or inventories at home. Any country pursuing such a policy has to pass through a phase of adjustment, during which economic expansion has, as a rule, to be slowed down. It is impossible to frame economic and monetary policies that are perfect in every respect all the time. An interval of adjustment, when required, serves its purpose by providing a firmer and more reliable basis for renewed growth. It has been the experience of several countries in Europe, as elsewhere, that once stabilization measures had become effective, a revival of activity set in. This is true of nonindustrial as well as industrial countries. After all, not all countries of Europe are highly industrialized. Finland, whose exports largely consist of forest products, has over the last year or two been cited as an example of a country in which a policy of ensuring monetary balance ushered in a period of economic stagnation. It is true that for a time industrial production declined, but not for long. The recovery has now more than made up for the decline in the period of adjustment, and in recent months industrial production has been running 10 per cent higher than in the same period last year.

Sometimes I am told that the expansion in some countries would not have been at the rate actually achieved had it not been for resort to credit expansion, which, though necessarily inflationary, had in fact helped to finance part of the investment. It is, of course, difficult to tell what would have happened under different circumstances, but I have often wondered whether progress would not, on the contrary, have been greater if more attention had been paid to monetary stability, with the added advantage that the progress would have been achieved under more satisfactory social conditions. After all, the great development of the U.S. economy from 1870 onward was not based on inflation, and the rate of expansion was in fact as high in the period of slightly falling prices up to 1900 as it was in the years of slightly rising prices that followed up to the First World War.

Over the last ten years, industrial production in the Western world has been expanding at a rate of almost 5 per cent per annum, and the volume of imports of the industrialized countries by 6 per cent. On the other hand, the exports of the primary producing countries have risen in volume by only a little over 3 per cent per annum, and the real value of these exports, in terms of their power to purchase imports, by just over 2 per cent. In a large measure, these developments have generally been the result of certain technical aspects of recent economic growth. Thus, in the highly industrialized countries expansion of output has been heavily concentrated on more complicated manufactured goods, such as machinery, electrical goods, aircraft, etc., with a relatively low raw material content, which has limited the demand for raw materials. The more effective use of materials, perhaps most strikingly illustrated by the tin-saving process of electrolytic plating, has had a similar effect. In addition, the substitution of synthetics for raw materials, which has been rapidly spreading in many of the major branches of manufacturing, has been of great importance, for example, the use of plastics, detergents, synthetic fibers, and synthetic rubber, to mention just a few. The immediate impact of these changes is no doubt unfavorable to raw material exporters, at least during a transitional period, but they are part of the technological progress of our times.

Even so, these problems should not be approached in a spirit of gloom and fatalism. Wise policies can undoubtedly help to solve them. In the first place, it is the task of each primary producing country to see that its products are moving to the markets; so far as it is necessary to give support to producers, it is important that such support should not be financed in an inflationary way, for this would raise costs and make sales more difficult. Indeed, every effort should be made to introduce more effective methods of production, so as to render production more remunerative and so that the country in question does not lose ground to other producers but is able to retain its share of the market.

The more highly industrialized countries also have their contribution to make to the solution of this problem. They can do so, firstly, by helping to sustain demand for raw materials by maintaining their own economic progress. Generally speaking, demand has been well maintained in the postwar years; the cyclical recessions in this period have been mild compared with those of earlier periods, even before 1914. In none of the years of recession in the United States, 1949, 1954, and 1958, was there any decline in the volume of primary producers’ exports, and the purchasing power of these exports in terms of imports declined only in the most recent recession, though it flattened out somewhat in 1949. By now the Western European countries have, for the most part, passed through the recent phase of adjustment which, for a number of them, was necessary to enable them to regain monetary strength. In the future, they should be less affected by monetary problems; this is of importance when it is realized that the Western European countries as a group absorb more than one half of the raw materials and foodstuffs exported by the underdeveloped countries. The recovery from the recession in the industrialized countries has already gone some way toward easing the difficulties of the primary producers. The increased demand for many of their products this year has made it possible for them to increase the volume of their exports; and in the last six months, the general level of primary product prices has shown some recovery.

Secondly, importance attaches to tariff policy and protection generally in the industrialized countries. Their food production, often highly protected, has risen despite a decline in the agricultural population. Here is a field in which these countries could make an effort to dismantle a number of protectionist measures that are clearly most harmful to the interests of the primary producing countries.

Some words should be added about possible discriminatory measures, which are of course always regarded as particularly unfair. When at the beginning of this year the six countries of the European Economic Community made their first reduction of tariffs, they extended this benefit in the main to all members of the GATT, and thus to all primary producers which are contracting parties to that Agreement. When the second year comes around, it may be possible to agree upon a similar arrangement, and, in view of recent developments, parallel action might well be taken by the new group of seven European countries. After all, Europe has benefited so much from the relatively low prices of primary products in the last three years that it might well extend some counterbenefits to the producers of these products.

Many of the raw material producing countries are exporters of only one major commodity, and for them in particular a solution must be sought in the diversification of their economies, not least in order to develop additional lines of exports. Diversification, however, requires, as a rule, capital resources beyond what these countries can raise in the form of savings from their own, often low, incomes.

Countries engaged in development have therefore sought in the past, and will seek in the future, to avail themselves of foreign resources to supplement their own savings. The use of such resources enables them to increase their imports, and thus will tend to produce a current account deficit in their balance of payments, which is to be expected in such circumstances. The question of proper timing of investments in relation to the receipt of foreign resources is then of particularly great importance. If, for instance, large investments which are not matched by sufficient domestic savings are undertaken at a time when foreign resources are not available, and the attempt is made to obtain the funds required by expanding credit, the effect will generally be a combination of internal inflation, import restrictions, and a loss of monetary reserves. Even if the requisite foreign resources become available at a later date, it is not always easy to reverse the primary inflationary impact and to replenish the reserves. If monetary stability is not to be endangered, it is therefore important that investment expenditures for which domestic savings are not sufficient should be supported in good time by foreign capital. The coordination of the flow of capital and the rate of development expenditure is a task important both for the developing countries themselves and for the countries that supply the external resources. The problems of development require a balance of responsibilities between those who provide and those who receive capital. All partners are equally concerned with the continued creditworthiness of the developing countries. Official sources cannot be expected to furnish all the capital needed, and substantial amounts of private capital must also be attracted to the underdeveloped countries; creditworthiness is important for both types of capital but is, of course, a matter of prime importance where private capital is concerned; and in judging creditworthiness, monetary stability is a most important criterion. Both the countries supplying and the countries receiving capital have everything to gain if they can avoid narrow nationalism, for these are not purely financial problems; it is in the interest of both parties to see that the technical methods employed are likely to produce the best results from the investments which are made. As attention to monetary stability must be the concern of the receiving countries, so the resources provided by the supplying countries, which have now increased in number, will be more effectively employed to the extent that the receiving countries are allowed to buy in the cheapest markets.

Since the monetary situation is influenced by the methods employed to finance development expenditures, the Fund has an interest in these matters, even though its own financial assistance is restricted to short-term balance of payments purposes, drawings on the Fund being repayable not later than three to five years after the drawing. I may recall in this connection that resources made available by other institutions to support stabilization programs arranged with the Fund have sometimes been of a long-term character. I must also point out that one of the purposes of such stabilization programs is to improve the creditworthiness of the countries concerned in order to give them a surer basis for their long-term development.

I cannot leave this subject without also referring to the commodity agreements which have attempted to regulate the supply and prices of particular commodities. Even the most effective of these agreements can only be said to have been moderately successful. Indeed, those commodities with regard to which market forces have been allowed to have their influence most freely seem often to have fared better over a period of years. When considerable stocks have been accumulated, nationally or internationally, difficulties are bound to arise, however much those in charge seek to avoid disturbing the markets or impairing the interests of other countries’ producers.

We have seen that there is no single cause for the problems of the primary producing countries, and neither can we say that there is one single remedy. Progress must be sought along different lines: in some fields, action is required by the primary producers themselves; in others, the active support of the industrial countries is needed. If this varied approach is followed, there is every prospect of an improvement in the general situation. In these efforts, international institutions have a role to play. Among the primary producing countries affected by temporary difficulties, some have turned, and will in the future turn, to the Fund with requests for assistance, sometimes of a seasonal character, sometimes for the elaboration and implementation of stabilization programs. The dimensions of the problem are now more clearly known, and the difficulties appreciated. Much remains to be done, but with good will and appropriate policies on all sides, these problems can, I am sure, be solved.

Monetary stability has indeed become a guiding principle for the vast majority of countries. In all likelihood, world inflation is over. Now that the excessive liquidity inherited from the war has been worked off, credit policies have become more effective. Output has risen, competition is fiercer, and the resistance to cost and price increases has grown in strength. If we look back at past periods of economic history, we find that a persistent decline in raw material prices has more than once been an indication of the cessation of general price increases. Since more and more currencies have become convertible, and since supplies of goods are readily available in most lines from a variety of sources, no individual country can, without grave risks, afford to deviate from the international price trends. Naturally, countries must seek to avoid these risks; and when they make more and more efforts to balance their budgets or, at least, to reduce their fiscal deficits, many of them do so not only as part of an anticyclical policy, but also for balance of payments reasons. The present expansion needs to be carefully watched, for we have to remember that a pronounced investment boom, if one develops, would involve not only progress but also strain, and could have dangerous consequences if it were allowed to get out of hand.

The meeting of the Fund two years ago here in Washington was held at a time of acute tension in the field of foreign exchanges, characterized by rather strong movements of funds, flowing especially to two countries, the Federal Republic of Germany and the United States. Germany has continued to have a fairly substantial current account surplus in its balance of payments, but thanks to considerable capital exports (including debt repayments), the foreign assets of the banking system have been rising at a much slower pace. Developments in the U.S. balance of payments have also shown capital exports continuing at a high level; however, the current account surplus began to decline at the end of 1957, and a deficit emerged in the first half of 1959. The over-all effect of these developments has been an outflow of gold from the United States and an accumulation of dollar assets in the hands of other countries. To some extent, this change has reflected the increased strength of producers in other countries who are now able to deliver more promptly a greater range of goods at competitive prices. It has also been connected with internal developments in 1958-59, when there was a sharp increase in the U.S. budget deficit and a substantial degree of credit expansion. These developments helped to overcome the recession, but the consequent increase in liquidity has, even in such a large country as the United States, affected the balance of payments position. The measures adopted to remedy the situation have been on the same lines as those which would have been taken in a similar situation in other countries, that is, balancing the budget and restricting credit while at the same time paying greater attention to costs. These actions serve as a clear demonstration that inflationary tendencies are being withstood, and their effects should naturally extend to the balance of payments. It is perhaps pertinent to recall that increases in interest rates, made in response to a strong demand for funds actively employed in business, do not arrest economic progress, but rather have the merit of ensuring a more balanced growth. They have, further, the advantage that a subsequent downward adjustment of the rates can be made effective fairly rapidly to provide an active stimulus to recovery if a change in the business trend requires it. Stiffer monetary policies are, of course, not intended to initiate a period of deflation, but represent simply an adjustment to a particular phase of the business cycle. By avoiding the twin dangers of inflation and deflation, the basis should be laid for a vigorous expansion in production and trade.

Over the last two years, we have seen a shift in emphasis in the relations between the United States and other countries, the move to external convertibility at the end of last year and other steps toward greater freedom in trade and payments, a generally lower level of prices for primary products, and a widespread slackening of inflationary pressures; all these developments have created a new situation which has revealed the need for a fresh examination of many problems, both domestic and international. The Fund has felt the impact of these changes. As a relatively young institution, it has been faced again and again with fresh problems; and it has had to solve, and will have to solve, such problems as they come along—solvitur ambulando, as the Latin tag goes. Gradually, however, general principles have emerged; in their Annual Reports and in specific statements, the Executive Directors have from time to time explained the principles and policies which govern their decisions.

For the future, it is an important fact that the Fund now has at its disposal sufficient resources to meet the demands that may be made upon it, even in emergencies; this has given members confidence that they can move toward greater freedom of trade and payments without having to pay undue regard to temporary balance of payments difficulties. Indeed, the proposal to increase the Fund’s resources itself cast a shadow before it, since it was certainly one of the considerations which prompted some European governments to make the move to external convertibility at the end of last year.

Events have been moving faster than men’s minds. Recent improvements have implications for policy which have not yet been fully grasped. The time has now come for member countries to make full use of the opportunities opened up by the renewed increase in production and the general strengthening of the international financial structure.

September 28, 1959.

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