INTERNATIONAL liquidity continued to be the subject of intensive examination during the first quarter of 1964. In a speech in Dallas, Texas, on March 27, Frank A. Southard, Jr., Deputy Managing Director of the International Monetary Fund, referred to the inquiry which the Fund itself is making, and commented: “I do not hesitate to assert that the Fund is an effective and experienced instrument for providing supplemental reserves or liquidity on terms which embody a judicious mixture of automaticity and conditionality.” Mr. Southard’s speech is reproduced in full in International Financial News Survey, Vol. XVI, Supplement to No. 13.
Many other comments on international liquidity were made during the quarter.
Annual Report of the Bank of Canada for 1963: “The world monetary system relies heavily upon the use of the U.S. dollar and sterling as supplements and alternatives to gold in national reserves of liquidity…. On the whole the reserve currency system has worked well, though it has on occasion shown some signs of strain…. The International Monetary Fund has been the principal organization for international cooperation in the international payments field, and it has done much to develop an internationally accepted structure of obligations and practices in respect of foreign exchange rates, exchange restrictions, and the financing of, and adjustment to, balance of payments deficits. There are various ways in which Fund arrangements might be changed to give additional support and flexibility to the international monetary system, and it will be useful to have them reviewed at this time…. But sight should not be lost of the fact that the purpose of international liquidity is to give time for the processes of balance of payments adjustment to be carried out in an orderly way, and not to replace them. Provision of international liquidity on a scale which would facilitate the postponement of necessary adjustments would be detrimental to the interests of all countries.”
Professor S. Posthuma, Director of the Netherlands Bank (from an article published in Het Financieele Dagblad, Amsterdam, February 1964): “As matters now stand, joint measures affecting the structure of monetary reserves in greater or lesser degree are indispensable. The fact that the views which may form the basis for action in this matter are determined not only by objective but also by political considerations will doubtless lead to a search for compromises. The inflationary atmosphere which now prevails in many European countries, coupled with the United States’ understandable dislike of measures which would in themselves promote balance of payments equilibrium but might at the same time frustrate the absorption of part of the large number of unemployed persons and unused capacity entails a certain danger. In such an atmosphere the need for creating expansionary potentialities may easily be overestimated. This involves a certain danger of seeking compromises which tend to prolong the actual international imbalance without providing a sound basis for future needs.”
Gabriel Kielland, Director of the Bank of Norway (article in Aftenposten, Oslo, February 15, 1964): “The scarcity of monetary gold in relation to the continuously increasing short-term liabilities of the United States and Great Britain makes it imperative to establish a currency unit with a gold value which cannot be changed unilaterally by an individual country. This means that we must have a currency unit the gold value of which may be changed only by a majority decision among countries which are members of an international institution and have assumed binding obligations according to an international agreement…. The International Monetary Fund has become an important factor in the payments system…. The Fund closely follows the economic development in each country, exerts criticism, and gives advice and technical assistance. … In addition, outside the Fund, a cooperation between the countries in the economic field and in the field of monetary policy and, not least, foreign exchange policy has been created which nobody would have dared visualize 20 years ago. The conditions for the establishment of a world currency thus exist, and in a situation where this is especially essential…. With a few changes in the Articles of Agreement of the International Monetary Fund, the Bancor may be a reality…. The purpose is, through Bancor, to create a supplement to gold and, at the same time, to lay the foundation for the construction of an organized capital market… where the bonds are government guaranteed and denominated in a currency which is as good as gold.”
Federal Reserve Bank of New York, Annual Report for 1963: “The initiation in 1963 of formal studies looking forward to the time when the United States deficit would no longer be adding to the liquidity of the rest of the world was welcome. It was equally clear, however, that a solid foundation for meeting future liquidity needs already existed in the International Monetary Fund and in the cooperative arrangements undertaken by the monetary authorities of the leading industrial countries in the recent past. There could be no doubt, however, that the dollar’s role as the major reserve currency, which had served the world so well, had to continue if further progress was to be made. Indeed, it had to be recognized that suggestions for revolutionary changes in the international financial mechanism were fraught with danger. Just as increases in the volume of liquidity at home were not the full answer to the problems of the domestic economy, major attention in the international area needed to be paid not only to over-all liquidity but to the nature and uses of any new liquidity instruments that might be created, as well as to the extent to which their employment would be compatible with the exercise of the basic disciplines necessary for achieving and maintaining payments equilibrium. … By the end of the year it was clear that the network of cooperative currency arrangements, backed by IMF quotas and supplementary borrowing facilities, was capable of mobilizing truly impressive resources in support of any currency temporarily under duress. At the same time, it was also evident that these arrangements were facilitating progress toward international equilibrium. The atmosphere of calm and confidence in the exchange markets, sustained by the concerted official action, provided financial authorities with a margin of time to adopt and carry out appropriate policy solutions in an orderly manner.”