Presentation of the Thirteenth Annual Report1 by the Chairman of the Executive Board and Managing Director of the International Monetary Fund, Per Jacobsson
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1958
It is with great pleasure that I join you, Mr. Chairman, in thanking the Government of India for the invitation to hold an Annual Meeting here in New Delhi, and for the gracious words with which the Prime Minister, Mr. Nehru, has welcomed us today. Almost all over India, if one digs in the earth one finds traces of human efforts—of civilization succeeding civilization from before the dawn of history. This persistence of human endeavor in the face of recurring upheavals due to war, famine, and other difficulties over the centuries leaves us with a profound impression of human courage and faith. The culture of India has its roots in the past and we have not far to go to see the architectural monuments which still today are a source of delight. But the India in which we are today is a country in process of change, accomplishing great new tasks through the application of up-to-date techniques in industry and agriculture.
I also have the pleasure of welcoming five new members to the Fund—Malaya, Tunisia, Morocco, Spain, and Libya—which are participating for the first time in an Annual Meeting of our institution. When new countries join the Fund and Bank, they naturally do so because of the benefits that membership involves. Among these benefits, they count, I believe, not only the technical and financial assistance that they may receive, but also the opportunity of participating more fully in the efforts to build a new and strong monetary system in the world. No doubt, for the trend of world affairs as a whole, the economic and financial measures taken in the larger countries play a predominant role, but the larger countries themselves are fully aware of the fact that it will not be possible to bring order and harmony into a world system unless countries—large and small—adhere to some commonly evolved principles and practices. Membership in the international organizations gives the smaller countries a greater opportunity not only to keep themselves better informed but also to make their influence felt, as partners in the international economy. It has been brought home to me during nearly 40 years of international service that in matters of finance—as in so many other fields—changes in public opinion are of considerable importance. The Fund has shown that, in its own field, it can be a powerful force for crystallizing informed public opinion.
We had, in fact, an example of the Fund’s influence in this respect at last year’s Annual Meeting in Washington. You will remember the growing tension in the European exchange markets last summer when pressures on sterling were intensified by rumors of a possible revaluation of the deutsche mark. At the height of that tension in September, a number of measures were taken in the United Kingdom including an increase in the bank rate from 5 per cent to 7 per cent, while at the same time the German central bank—which was gaining reserves—reduced its discount rate from 4½ per cent to 4 per cent. These measures, together with strong declarations made at the Annual Meeting that the parities of both sterling and the deutsche mark would and could be maintained, proved sufficient to restore calm. The Meeting of the Fund thus served as an effective sounding board for declarations of exchange policy even though no financial assistance was extended by the Fund at that time. By themselves, however, such declarations would have been of little avail; the firm foundation for the renewal of confidence had already been laid by the effective measures taken in the countries concerned.
We must regard it as a most significant departure that the British bank rate was raised to a level as high as 7 per cent, a most unusual rate in periods of peace. That such a move could be envisaged and put into effect indicates on the one hand that the public in general had become tired of inflation and of the recurrence of crises and was therefore willing to accept measures which a few years earlier would have seemed out of the question; and on the other hand that the British authorities, as they themselves declared, had decided to give the highest priority to the strength of sterling and the soundness of their international position. It is also noteworthy that action was taken not in one country alone but simultaneously in the two countries most closely concerned. It was in accordance with the classical credit rules that the country losing reserves should increase its discount rate while the opposite action should be taken in the country gaining reserves. This was, indeed, an example of the kind of complementary policy which, time and again in the past, has proved so effective in restoring balanced conditions.
The tension in the European exchange markets occurred at a time when boom conditions still prevailed in the world economy, characterized by a general feeling of optimism and an upsurge in investment—often both public and private—with consequent pressure on the credit structure and unmistakable inflationary tendencies. In these circumstances there was the danger for quite a number of countries that a too rapid expansion in the domestic economy would have adverse effects on the balance of payments. Several of the countries facing such a danger turned to the Fund for temporary assistance while their corrective measures had time to take effect. Assistance of up to 50 per cent of its quota was granted to Denmark ($34 million), to Japan ($125 million), and to the Netherlands (with a drawing of $68.8 million and a standby arrangement of the same amount). In all these cases, the Governments made declarations of intent as to the policies they would follow, which included stricter fiscal and credit policies but no intensification of quantitative restrictions on imports. Before long, each of these countries was able to register a distinct improvement in its balance of payments and reserve position. Denmark repurchased within one year a substantial part of the amount drawn; the Netherlands canceled the unused stand-by arrangement six months before the date on which it was due to expire and in the last two weeks has repurchased $33.8 million of the drawing; and Japan has also within the last two weeks repurchased $62.5 million. Access to the Fund resources thus proved to be of real advantage, even when obtained for short periods, and the speedy repurchases at the same time underlined the essentially revolving character of the Fund.
Denmark, the Netherlands, and Japan are all countries highly dependent on international trade. They have, of course, felt the impact of the recession, but for none of these countries has there been any actual decline in exports. World trade figures which are now available indicate that there has been some decline in 1958, compared with 1957; in value, trade probably declined by about 6 per cent in the first half of 1958, but in volume by only about 2 per cent. However, it is interesting to note that exports for the world excluding the United States seem to have been fractionally higher in volume although less in value in the first half of 1958.
The major element in the decline of world trade has therefore been the marked fall in U.S. exports, which in the first half of 1958 were 18 per cent less than in the same period of the previous year. The extent of this fall was, however, due largely to abnormal circumstances in that in the early months of 1957, while the Suez Canal was closed, countries in Europe and elsewhere had to turn to the United States to an exceptional degree for shipments of foodstuffs, cotton, and fuel; but the fall also reflects the growing ability of European countries to meet their current needs more fully from their own production. U.S. imports in the same period declined only 2 per cent in value, while in volume they probably increased by over 2 per cent. So far as the import of industrial raw materials is concerned, the value declined, but even here the volume was fairly well maintained, although there were exceptions for individual commodities. It appears that the brunt of the reduced demand in the United States has, over a large field, so far, fallen on the marginal domestic producers. The import of foodstuffs actually rose. It is, moreover, an interesting fact that there has been no fall, in either volume or value, in imports from the industrialized countries in Western Europe and Japan. This is due partly to the maintenance of consumer demand during the recession but also reflects the growing proportion of manufactured goods in total U.S. imports. In that way the United States is beginning to conform to what has, for long, been the established pattern of trade between the industrialized countries of Europe.
It is relevant to recall that, before 1914, Germany and the United Kingdom were each other’s best customers and are again increasing their mutual trade. Now that the United States has become a creditor nation in relation to Europe, it is only natural that it should increase its purchases from Europe so that the settlements of both commercial and financial obligations between Europe and the United States will be effected more as the result of direct trade and no longer be so dependent on the often uncertain relationship of triangular trade.
The fact that so many countries outside the United States have been able to keep up or even to increase their exports has been of the greatest importance, not least from a psychological point of view. It gave countries which were faced with exchange difficulties the confidence that the maintenance of cautious policies involving a measure of restraint in their domestic economies would enable them to restore balance in their foreign exchange positions. In Japan, for instance, as in the United Kingdom, the authorities decided that the maintenance of the present parity and the establishment of a healthy balance of payments position should be regarded as a main consideration in the formation of policy. In the first seven months of 1958, Japan’s exports were 4 per cent higher than in the corresponding period of 1957, as an increase in shipments to the United States more than offset a decline in exports to Southeast Asia and Africa, where Japan’s products encountered intensified restrictions, while exports to Europe were maintained at a high level. The regional distribution of Japan’s exports in this period has a wide significance. Neither in North America, nor in Europe, has there been, generally, any intensification of trade barriers, in the form of either increased tariffs or import restrictions—although there have been a few not unimportant exceptions. It is undoubtedly true to say that the relatively liberal trade policies pursued in the present recession have reflected a better understanding of the fact that whatever may be gained in a limited field from the imposition of restrictive measures will be outweighed by the harm done to the community of nations (including the countries imposing the restrictions) through a general decline in world trade. Commercial policy must, of course, not be regarded in isolation. It has to be seen in the context of all the antirecession measures which have been taken in various countries—in particular, the easing of money (together with a reduction in interest rates) which was first applied in the countries with a strong reserve position, especially the United States and Germany. The combination of expansionary policies in these countries and the more cautious policies continued by others has, on a world-wide scale, been an example of the sort of compensatory action which is essential if a fundamental balance is to be restored under conditions of active trade and thus has been of great benefit to the world economy. Thanks to the substantial gold holdings which are at the disposal of the U.S. authorities, they have been able to ease credits, even when there was an outflow of gold. As pointed out in the Annual Report which is before you, “Whatever embarrassments the current world distribution of gold reserves may present to certain countries, it is reassuring to know that some of the large industrial countries are able to face the task of preventing excessive cyclical fluctuations without being hampered by any insufficiency of international reserves.”
For the industrialized countries other than the United States, the result of these complementary policies has been that by the end of June 1958 all but one or two of them had larger gold and dollar holdings than a year earlier. In the aggregate, the rise in the gold and liquid dollar holdings of these countries in the nine months from the low point at the end of September 1957 to the end of June 1958 has been impressive—amounting to about $2.4 billion, which more than offset the loss of about $1.4 billion in the previous twelve months. Under such circumstances these countries in general had no balance of payments reasons for intensifying trade restrictions—which indeed helps to explain why they could maintain a relatively liberal trade policy and in some cases even widen the field of liberalized imports. It is only when trade flows freely that one can obtain a true measure of the value of a currency; and it is by continued liberalization of imports that genuine progress can be made toward convertibility.
It is, however, necessary in this connection to mention another factor which has been of great importance for the industrialized countries, namely, the improvement in their terms of trade. That the prices of the raw materials and foodstuffs which the industrial countries import have fallen over recent years, while the prices of their export products have generally been maintained, has been a great advantage to these countries; but for the many primary producing countries it has, of course, had the opposite effect.
These price movements have been intensified by the recent recession but have by no means been entirely due to it; some long-range structural factors have also been operating. The increased competition of substitute commodities, such as chemical fibers, synthetic rubber, and aluminum, has for some time exerted a downward pressure on the prices of the vast majority of natural products. There has also been a very rapid expansion of output of some of the primary products, stimulated by the high prices during the Korean boom and, for some commodities, even later. There is, I think, a general feeling that the problems connected with fluctuations in prices of primary products should be more thoroughly examined in their various aspects with a view to arriving at some positive solution—compatible, it is to be hoped, with the working of an effective market system. In any such examination, account should therefore be taken of both supply and demand factors (including the sale of accumulated stocks) and also of the financial implications of support schemes which in the past have often given rise to inflationary tendencies. There are many techniques now practiced which need to be reviewed afresh, including even the influence of taxation and differential tariffs on the prices of some products in the consumer countries.
The Fund in its work is necessarily aware of the difficulties of the primary producers. Their difficulties are, of course, not all due to adverse price movements; their domestic policies have not infrequently been inadequate to eliminate inflationary financing, even in years when export earnings were good and there was thus the possibility of building up reserves. On the other hand, it is only fair to say that in the last two years there have been signs of a more realistic attitude in most of these countries; with a growing distaste for inflation, and a strong desire to avoid the re-imposition of controls, the authorities have been able to pursue sounder fiscal, credit, and exchange policies. Although the prices of their products have declined, these countries—except, I am afraid, those relying mainly on exports of metals—have had some help from the fact that the volume of their exports has generally kept up well thanks to the effects on demand of the lower prices in the markets for their products and the maintenance of a general level of demand in a number of the industrialized countries as a result of the antirecession measures taken.
As far as the Fund’s financial assistance to the primary producers is concerned, most of its transactions have been with Latin American countries. As in previous years, assistance falls into certain broad categories, not always sharply separated but still with certain specific features in each group.
In the first place, the Fund has granted assistance of a seasonal character. The balance of payments of countries depending in their export trade on one or two main commodities is apt to be subject to strong seasonal movements requiring additional resources—normally limited to a period of six months. Financial assistance of this nature has been granted to Cuba, Ecuador, El Salvador, Haiti, Honduras, and Nicaragua. Four of these countries—Cuba, El Salvador, Haiti, and Honduras—have convertible currencies under Article VIII of the Fund Agreement, and the other two—Ecuador and Nicaragua—have maintained a high degree of exchange stability.
Secondly, financial assistance has been granted to countries in connection with the carrying out of stabilization programs; this category includes Bolivia, Brazil, Chile, Colombia, Paraguay, and Peru. The main lines of these programs have been indicated to the Fund in declarations of intent which have formed an essential part of the stand-by arrangements in these cases. All these countries have made parallel arrangements to complement the financial assistance received from the Fund with credits from other sources. The Fund has worked closely with these countries for several years in a common endeavor to restore balance in their economy, and it is aware of the efforts made by them to sustain their financial positions in the face of often great difficulties.
Take, for example, the case of Brazil, which in October 1957 drew from the Fund an amount equal to 25 per cent of its quota, raising its net drawing on the Fund to the equivalent of 50 per cent of its quota; for a number of reasons the measures taken in that connection proved insufficient to achieve balance either internally or in the foreign exchange markets. In June 1958 the Brazilian Government presented to the Fund a more comprehensive program, which still did not include measures for stabilization in all sectors; the measures were designed rather to arrest the forces of internal inflation as soon as possible through the imposition of credit ceilings and the compression of government deficits together with certain adjustments in the exchange structure which were, however, limited by consideration of the special exigencies of the coffee policy. The program provided for further steps to be taken in all these fields by stages. Brazil entered into a standby arrangement with the Fund for a net amount of $37.5 million, equal to the second credit tranche of its quota, and at the same time negotiated credits from other sources to the extent of $158 million, the largest amount being obtained from the Export-Import Bank of Washington. In the course of the summer, certain modifications were introduced in its coffee policy, and these were accompanied by further adjustments of exchange policy. It is the declared objective of the Brazilian authorities to reduce the complexity of its multiple rate system by a gradual movement toward a unitary rate as the internal anti-inflationary measures begin to take effect.
Brazil was not, of course, the first country to make parallel arrangements to secure credits from other sources in connection with financial assistance from the Fund. As early as 1954, Peru negotiated parallel credits of this sort in support of its stabilization program; many other countries have since followed a similar pattern. Two other recent examples have been France and Turkey. In January 1958 the French Government presented to the Fund a financial rehabilitation program on the basis of which Fund assistance was granted to the extent of $131 million—raising the Fund’s net assistance to France to over 50 per cent of its quota and thus, under the principles governing access to the Fund’s resources, placing it in the range of assistance requiring “substantial justification.” Simultaneously, France obtained $250 million from the European Payments Union and $274 million from various U.S. agencies, largely in the form of postponement of debt service. The main features of the French program were included in the provisions of the stand-by arrangement, and the program itself was made public by the French Government. The program included an interesting provision, adopted by the French Parliament in December 1957 as part of the Budget Law, requiring the Government to make three reports to Parliament in the course of 1958 on the execution of the program; two of these reports have already been made.
In August 1958 the Turkish Government announced the adoption of a comprehensive stabilization program which included stricter credit, fiscal, and public investment policies together with some depreciation of the exchange rate in the context of a reform of the exchange system. On the basis of this program, which had previously been submitted to the Fund, the OEEC, and the U.S. Government, financial assistance was obtained by Turkey to the extent of $100 million from member governments of the OEEC and the European Payments Union, $234 million from the U.S. Government, and the equivalent of $25 million from the Fund. This was an important cooperative effort and was further strengthened by a six months’ standstill arrangement on a substantial part of Turkey’s external commercial debt, in order to give time for negotiations on new schedules of payment.
Considerable experience with practical problems and the techniques for dealing with them has been gained by the Fund in this recent period of great activity. However, only a few general observations are possible here. In the three cases mentioned—Brazil, France, and Turkey—the use of the Fund’s resources went beyond the first credit tranche and thus came within the range in which drawings are expected to be in support of a sound program likely “to ensure enduring stability at realistic rates of exchange.” As in all such cases, the Governments presented comprehensive programs in which the main emphasis was laid on measures to arrest inflationary credit creation for either the public or the private sector. The stabilization efforts in all three countries also involved some adjustments in exchange rates with a view to making them more realistic. It was, however, recognized that all the adjustments which were desirable (including the return to an effective unitary rate) could not in every case be made all at once. Efforts would in some instances have to be spread over a longer period, with further steps being taken as soon as circumstances permitted, and provision was made for continuing close consultations with the Fund on these matters.
Countries embarking upon stabilization programs are often in need of different kinds of foreign resources, and it is one of the advantages of these “parallel arrangements” that in some measure they provide the countries with assistance tailored to their particular needs. The Fund’s assistance, for instance, is of a short-term character (repayable within three to five years) and is designed to strengthen the monetary reserve positions, while resources obtained from other agencies may be either related to special categories of payments (as when furnished by the European Payments Union) or of a more long-term character making them appropriate for investment financing.
While the financial contribution of the Fund to the support of these programs has often been limited to some 20 or 30 per cent of the total amount furnished from all sources, the Fund has generally been actively concerned with the elaboration of the programs presented. Monetary problems usually arise which fall clearly within the sphere of activity of the Fund; and the various countries, moreover, seem to welcome the cooperation of Fund officials because of their international orientation and specialized knowledge of their particular problems. The close personal contacts and intimate knowledge of conditions in member countries which have been established, largely through the Fund’s annual Article XIV consultations, have proved very valuable, in these and in other cases. The approval of drawings and stand-by arrangements is, of course, a matter for the Executive Directors, who are in permanent session. Over the years they have evolved their own modes of work and traditions, which blend an adherence to the principles of the Fund with a flexible approach to the varying circumstances that confront them.
Whatever the Fund’s special connection may have been with a country requesting assistance, it is, of course, for each agency or institution associated in these parallel credits to decide for itself, in the light of its own principles, whether to add its support on the basis of its independent judgment as to the adequacy of the program presented.
I have just referred to the annual Article XIV consultations, which constitute a very considerable portion of the current activities of the Fund. Among the other activities, I may briefly recall here those relating to changes in par values and exchange rates, alterations in exchange restrictions, the provision of technical assistance, and the continued organization of the Fund’s trainee program, which, in response to demands from member countries, has been extended in scope over recent years. These tasks are less spectacular than the granting of financial assistance, but they form a very essential part of the Fund’s work.
From the inception of the Fund to the end of September 1958, the total amount of Fund business came to $4.0 billion, of which $3.2 billion represented drawings and the remaining $800 million balances outstanding under stand-by arrangements. By that same date, repayments to the Fund had amounted to no less than $1.4 billion. In the 12-month period from the end of September 1957 to the end of September 1958, the total business of the Fund came to $1.2 billion, compared with $2.4 billion in the previous 12 months. The high level of business activity in the last two years has provided the Fund with a large income. The accounts presented in the Appendices to this year’s Annual Report show that, in addition to meeting current expenses, it has been possible to cover fully the accumulated deficits of previous years, to pay for our new offices in Washington, and also to build up certain reserves. The Fund’s business activity, in the future as in the past, may be subject to sizable fluctuations, and this in itself is ample reason for providing adequate reserves.
By the end of September 1958 the Fund held gold and U.S. and Canadian dollars to an amount of $2.4 billion. If allowance is made for the contingent liability represented by unused stand-by arrangements, the Fund had at that date an uncommitted balance of about $1.5 billion in gold and U.S. and Canadian dollars. In the year which has passed, advance repurchases and the cancellation of stand-by arrangements have reinforced the liquidity of the Fund, and attention should also be drawn to the fact that there have recently been modest drawings of deutsche mark, Netherlands guilders, and sterling. There should in the future be greater opportunities for drawings of currencies other than those already convertible; and in this connection, I would like to mention that a study is being made of the possibilities that exist under the Articles of Agreement for countries making use of the Fund’s resources in nonconvertible currencies to reverse such drawings in the same currencies.
Now that the question of the adequacy of the Fund’s resources has been raised, it is of particular interest to examine the characteristics of the Fund’s various transactions in the light of the experience of the last two active years. The largest single transaction was the granting of financial assistance to the United Kingdom in connection with the Suez events in 1956, in the form of a drawing of $561 million and a stand-by arrangement of $739 million. That the Fund was able at that time to extend assistance on a very considerable scale was due partly to the fact that the small amount of business activity in the previous period had left intact the bulk of the Fund’s resources in gold and convertible currencies. Thanks to the measures taken in the United Kingdom and to the prompt action by the Fund, which was supplemented by a line of credit of $500 million from the Export-Import Bank of Washington, the position of this key currency was reinforced at a crucial moment and a major crack in the international exchange structure was thus avoided. Experience has shown (as was learned very forcibly in 1931) that once a crack starts it is difficult to limit its effect. It may lead to a series of forced devaluations of both minor and major currencies—devaluations not dictated by the realities of foreign trade and competitive prices.
The Suez emergency occurred in a period of world-wide boom, the strains of which became more pronounced in the first half of 1957, when it was accompanied by a general pressure on liquidity (domestic as well as international) and a number of countries made requests for use of the Fund’s resources. In fact, the largest total of the Fund’s transactions to date arose in the boom period of 1956-57. It is true that since the recession set in there have also been some transactions more definitely connected with this phase of the business cycle, but they have been for relatively limited amounts. Contrary to many predictions, neither the 1953-54 recession nor the 1957-58 recession has given rise to movements of funds to the United States; indeed, the recent recession gave rise to an outflow of gold from the United States, which in the first eight months of 1958 amounted to $1.8 billion. The interesting thing is that the Fund has been called into action in widely varying circumstances: in an emergency at the time of the Suez crisis, in conditions of boom and expanding world trade, and also to some extent in the period of recession. The conclusion can be only that the Fund must remain prepared for diverse contingencies, many of which cannot be clearly defined in advance. The only thing that one can reasonably state is that in any emergency, or even in any period of exchange tension, the movements of funds that will follow are likely to be on a large scale, partly because monetary confidence has not yet been fully restored (certainly not to the extent that existed in the years before 1914 after a long period of peace and currency stability), and partly because world trade has risen in both volume and value at a very rapid rate since World War II.
It is pertinent to recall that the resources available to the Fund were determined at the Bretton Woods Conference in 1944, and that most of the data on international trade available at that time related to the period just before World War II. By 1957, the physical volume of world exports was 60 per cent higher than in 1937 and the prices of goods moving in international trade had increased by 140 per cent. The delegates at Bretton Woods may perhaps have foreseen and thus allowed for a long-term rise in the volume of world trade, but it would seem from the records of the conference that the delegates did not, in general, count on the considerable inflationary rise in prices which has taken place; rather they feared a depression after the war. The consequence of the price rise has been that in real terms the Fund’s resources are now considerably less than was envisaged when its original endowment was made.
As regards the future trend of international liquidity, the important thing to remember is that trade, whether domestic or foreign, is financed primarily by commercial bank credit. Under a properly working credit system, backed in each country by adequate support from the central bank, credit should be able to expand sufficiently to keep pace with, and even stimulate, the growth of trade. So far as the financing of international trade is concerned, such an expansion can, however, be assumed only if, on the one hand, the necessary intimate knowledge of business conditions is extended by personal contacts between bankers and clients and, on the other hand, the general monetary conditions inspire sufficient confidence. In these respects, great progress has been made since the war. A smoothly functioning international credit system will in itself facilitate the task of the monetary authorities, since credits of an equilibrating character may again play the role in international settlements which they did in the past when the whole burden of a balance of payments deficit had rarely to be met by reserve movements alone. Of special importance is the liquidity generated in the financially important countries, which will have effects beyond their frontiers; it appears, for instance, that the credit expansion in the United States during the recent recession has helped to increase the supply of dollars available to the rest of the world and has thus facilitated international settlements. But again it has to be stressed that a smooth working of the credit system, particularly from an international point of view, will be possible only if the monetary authorities themselves are in a strong position. Situations may arise—in emergencies, in booms, and in depressions—when these authorities will have need of temporary assistance. Experience has shown that there are certain distinct advantages to be gained from the provision of such assistance by the Fund.
In the first place, the amounts made available by the Fund through drawings or stand-by arrangements are pinpointed to the particularly weak spots in the monetary structure and thus put to use where they are most needed to prevent a crack.
Secondly, the ability of the Fund to make its resources available on a large scale at one time is also of importance, since experience shows that in a period of acute tension extensive drawings will occur, usually affecting several countries at the same time. May I refer you to the first and second pages of the Annual Report, where it is said: “In the last quarter of 1956 and the first quarter of 1957, countries other than the United States had an aggregate deficit of about $1,100 million; during this period, Fund members with strained reserve positions drew from the Fund a net total of $800 million. The magnitude of the payments problems that arose later in 1957 may be approximately indicated by observing that, from the beginning of April to the end of September 1957, countries other than the United States, the Federal Republic of Germany, and Venezuela had gold and dollar deficits totaling nearly $2 billion. In order to finance these deficits the rest of the world drew upon official gold and dollar reserves to the extent of some $1,100 million, and current gold production made something like $300 million available. The remainder, $600 million, was covered by net transactions with the Fund.”
In economics it is the effects at the margin that count; countries must always be prepared to rely in the first place on their own resources and borrowing power. While the supply of gold from current production will also be a help in a general way, the difference between the ability to withstand disrupting forces and failure to do so may indeed be dependent on whatever extra amount can be made available promptly and under proper conditions.
That brings us to a third consideration, namely, that the Fund is not merely an additional source of credit for the monetary authorities of its members but is recognized more and more as a source of credit which is available in substantial amounts only to member governments that have satisfied the Fund of their intention and capacity to restore balance. It is indeed fortunate that some years ago, well in advance of the busy period of transactions that we have had during the last two years, certain principles and practices were formulated governing the use of the Fund’s resources in the different tranches. As you all know, requests for drawings within the gold tranche, normally 25 per cent of the quota, corresponding to the country’s own gold subscription, are almost automatically approved; for the next 25 per cent, the Fund’s attitude is a liberal one—the member being required to show that it is making reasonable efforts to solve its own problems. For any drawings beyond these limits, substantial justification is required, namely, that drawings must be in support of a sound program likely to ensure enduring stability at realistic rates of exchange.
These principles and practices constitute a code of behavior agreed to by the member countries. As was to be expected, it has been found that circumstances vary a great deal from country to country, so that flexibility has to be observed in the practical application; but there are also similarities, and in many respects the Fund is already evolving in these matters a uniform pattern based on its varied experiences. Naturally, the countries turning to the Fund are eager to re-establish their monetary positions and therefore are ready, within the limits of practical possibilities, to take whatever steps are needed to achieve that end. Often the more general provisions embodied in the statements which the governments have made to the Fund as to what policies they intended to follow merely reproduced public declarations of policy already made in the countries themselves. I know of no case in which the country concerned has not recognized that the measures envisaged in its arrangements with the Fund would be to its real advantage.
It is the broad purpose of the Fund to combine assistance with the observance of that financial discipline without which no international monetary standard can function properly. Before 1914 the old gold standard—harsh as it was in many ways—provided the basis for an international system under which production and trade were able to expand. It could count on general allegiance; its working depended largely upon the existence of “a few strong instincts, and a few plain rules” (to quote some words from one of Wordsworth’s Sonnets). But the gold standard broke down in the interwar period, and its breakdown was followed by a period of monetary disruption. Something new and more firmly founded had to be built, and that was the task at Bretton Woods. More monetary management is needed today, if for no other reason than that the public sector is now more extensive than it was in the past. More time is often required for corrective measures to take effect—and to gain that time financial assistance may be needed. But without the corrective measures assistance will be of little avail. If I may be allowed another quotation, I should like to cite some words of Clemenceau: “Liberty is the right to discipline oneself in order not to be disciplined by others.” And one might add: “or to be forcibly restrained by the hard facts of life.” The more that spirit permeates the member countries, the greater will be the stability of the monetary system and the easier the task of the Fund. But even so, the existence of a common pool is useful; the possibility of having access to the Fund’s resources may make countries more confident in their attempts to restore balance, and may indeed induce them to take stricter and more constructive measures than if they had to rely on their own resources alone. You have recently received a study by the staff, International Reserves and Liquidity, in which it is stated, “It is doubtful whether, in the circumstances of the world today, with world trade greatly expanded in volume and value, the Fund’s resources are sufficient to enable it fully to perform its duties under the Articles of Agreement.” It is in line with this conclusion and, if I may say so, a matter of great satisfaction that the initiative has been taken within the Board of Governors to propose that the Executive Directors be asked promptly to consider the question of enlarging the resources of the Fund by an increase in quotas.
Eighty per cent of the aggregate monetary reserves of the world (outside the communist bloc) is held by industrialized countries which also account for 60 per cent of world trade. But the other countries have large populations whose activities and aspirations are clearly of increasing importance to the world. These are generally the so-called underdeveloped countries seeking to diversify their production at the same time as they have to provide more food for their growing population. Labor is usually abundant, but other factors of production are often lacking, especially capital. The temptation is great to rely excessively on credit creation for financing public and private investment, but experience has shown that this is a risky process; the normal rise in the credit volume which can be counted on from year to year is generally no more than enough to meet the increasing requirements for working capital of many already existing or newly formed firms, and these are very often the small firms whose activities generally provide more direct employment than large enterprises with the most modern plant and equipment. There are in fact no large untapped resources which can be mobilized by credit creation. Persistent deficit financing through the central bank, whether directly or indirectly through the commercial banks, is really another name for the using up of monetary reserves. Practical experience has shown this to be the case in developed as in underdeveloped countries, and whether expansion relies on private enterprise or on government ownership and control. To promote development at a quicker pace than the underdeveloped countries’ own savings will permit, there is therefore need of resources obtained from abroad—and not only from official agencies but also from private sources. To attract such resources from private investors, countries will, of course, have to attend to their own creditworthiness. I am often asked what are the requisites of creditworthiness and I seek to make my reply in a few words: avoidance of inflation and fair treatment of foreign investments. These are pregnant words, for avoidance of inflation means the preservation of a monetary order under which an impetus is given to both exports and internal savings, and this goes a long way toward assuring fair treatment for foreign investors and thus toward attracting foreign capital and techniques on reasonable terms.
But will capital in fact flow from the more developed countries? At the height of the 1956-57 boom, there was a dearth of loanable funds and the opportunities for borrowing were therefore greatly restricted; but this did not last long. Were it not for the heavy burden of armaments expenditure in so many countries, more free resources for development would of course be available in all areas. But even in the troubled world we live in, it seems that more funds are becoming available now that war reconstruction is over and so many postwar adjustments have been completed.
This applies of course particularly to Western Europe which, barring major emergencies, should no longer on balance require financial resources from abroad but rather be able to contribute its share to the financing of countries in less developed areas. There have already been interesting examples of such financing, and more should be possible in the future.
Europe has again become an important customer for the goods furnished by other continents—and the fact that in the whole range of industrialized countries production and trade have expanded to far above prewar levels is, in itself, of great benefit to the rest of the world. But a further contribution will still be needed, and the Fund-Bank Annual Meeting here in New Delhi will no doubt help to increase the awareness of the problems and potentialities of the underdeveloped countries. I think it is fair to say that there has been a greater recognition of the difficulties of these countries and a growing willingness to extend assistance to them but, however much has been written on their particular problems in recent years, we have not so far arrived at a generally accepted and coherent view of the ways in which their domestic savings and foreign resources can best be harmonized to promote development with stability. I have already referred to the need of a renewed examination of the factors influencing the prices of primary products, and here we have another complex of problems which affect the nonindustrialized countries. No positive solutions are likely to be found to these various problems this week, but this meeting here in New Delhi will, I am sure, give an impetus to the search for such solutions; in the meantime, assistance will no doubt be continued according to the methods already employed. The strengthening of general world liquidity is, of course, a matter of importance also for the nonindustrialized countries, since it will contribute to a sustained expansion of world trade.
I have said that we live in “a troubled world” and few would gainsay that. Not only politically but also economically and financially, in recent years there has been a series of critical situations—boom followed by recession, tensions in the exchange markets, loss of reserves by many countries, and so on. If, however, we examine what eventually happened, I think we will reach the conclusion, perhaps with some astonishment, that the results in the end have not been too unfavorable. The exchange crises have been overcome; there is surely more confidence in currencies than there was some years ago; the recession has, it seems, once again been of rather short duration; international trade has not generally been hampered by new obstacles; foreign aid has been continued and efforts have been made by the Fund and others to extend financial assistance to countries in special difficulties, not only to permit corrective measures to take effect but also to enable them to continue their development.
We must all be prepared for difficulties; business fluctuations are, for instance, likely to occur in the future as in the past. But human beings are not powerless; by their actions, they can greatly influence the trend of affairs. There has been—and is—a more flexible and imaginative reaction in the countries of what is often called the free world than I think is commonly realized. And I believe we may regard the proposals before this meeting to examine the question of an increase in the resources of the Fund and the Bank as a further sign of willingness and determination to give added strength to the economies of the countries that are members of our institution.