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The Fund Meeting

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1964
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TWO THEMES dominated the Fund meeting: on the one hand the problems of the developing countries and the assistance that the Fund might render to them, and on the other international liquidity. In his opening address Mr. Schweitzer spoke first of the developing countries. He noted that virtually all the nations that have achieved independence in all parts of the world in recent years have chosen to join the Fund, and welcomed what he described as “a considerable improvement in the position of a large number of the less developed countries, mainly as a result of the rise in their export receipts.”

THE DEVELOPING COUNTRIES AND THE FUND

As regards Fund assistance, Mr. Schweitzer said that the Fund was convinced that this could be useful only if it was undertaken in support of effective action to achieve and maintain financial stability under soundly conceived and well-prepared programs. In these conditions the use of the Fund’s resources, although of short duration, could be of considerable assistance in the development effort by minimizing the need for precipitate and often costly adjustments of plans as a result of changing balance of payments situations. Such assistance was indeed being given: in terms of the amount of drawings outstanding in relation to quotas and the frequency of transactions, the developing countries had continued to be the principal users of the Fund’s resources in the past year.

Mr. Schweitzer spoke of the United Nations Conference on Trade and Development, and of the attention paid at it to giving better access to manufactured products from developing countries to the markets of industrial countries; he described this problem as “a recurrent theme in the Fund’s consultations and official statements of policy.” He indicated that the Fund would follow closely the studies called for by the Conference, including those on compensatory financing. He said that the Fund would cooperate with the Bank in exploring the problem of excessive debt service, and warned that industrial countries providing export credits should be sensible of the welfare of the borrowing country and not merely of the commercial interests of their own exporters. Mr. Schweitzer spoke also of the extended technical assistance that was now being provided by the Fund, both in the central banking field and in the expansion of its training program. He stressed that the dividing line between industrial and developing countries could never be firmly drawn and that “in the long run a firmly based increase in prosperity cannot be obtained by either category in isolation.”

In developing the various themes touched upon by Mr. Schweitzer, many Governors referred to what Mr. Octavio Gouvea de Bulhoes, Governor for Brazil, described as the “urgent difficulties of the developing countries and of those exporting raw materials.” The developing countries’ appreciation of the Fund’s plan for compensatory financing was expressed by several speakers, many of whom however expressed the wish that the plan could be extended and the financing made more readily accessible. Speaking not only for his own Government but as a representative of the Latin American countries and the Philippines, Mr. Arturo Pérez Galliano, Governor for Guatemala, said that “Latin America has been pleased to see the Fund’s participation in machinery designed to facilitate the solution of the balance of payments problems of the less developed countries. Nevertheless, we believe that to secure more effective realization of this goal it will be necessary to increase the percentages of compensatory financing and provide a more automatic mechanism for the utilization of the resources made available for this purpose.” In the same connection, Mr. N. M. Perera, Governor for Ceylon, drew attention to the position of countries whose balance of payments troubles were due to a rise in import prices rather than to a fall in export earnings.

The Fund’s expanded technical assistance was welcomed by many Governors. The Fiscal Affairs Department and the Central Banking Service were described by Mr. Habibullah Mali Achaczai, Governor for Afghanistan, as “two valuable new services.” Mr. Lakshmi Nath Gautam, Governor for Nepal, thought that the two new services were among a number of signs that the Fund had “shown interest in the problems of the less developed member countries,” and General Cesar Barrientos, Governor for Paraguay, thought them “particularly praiseworthy.”

In his closing address Mr. Schweitzer spoke of “the many thoughtful suggestions on the manner in which the Fund can be of greater assistance to developing countries,” and assured Governors that these would be carefully studied in the months ahead. Mr. Schweitzer said that, while the broader division of responsibility between the World Bank and the Fund that was envisaged at Bretton Woods should be maintained, he believed that in the interest of providing more effective assistance to the developing countries in solving their problems, it was of the greatest importance “to foster in every way the cooperation between the Fund and the World Bank.”

INTERNATIONAL LIQUIDITY

The other subject that dominated discussion at Fund sessions was the current working and proper future development of the international monetary system. The discussion centered largely on the question of international liquidity—that is, the question of the resources, including credit facilities, available to the monetary authorities of member countries to meet balance of payments deficits—and was largely based on studies that had been conducted throughout the previous year by the Fund and by the Group of Ten, that is, the ten industrial member countries that have joined in the Fund’s General Arrangements to Borrow.

There was general agreement on the importance of the subject. The Chairman, Mr. Aquino, pointed out that “the efficiency of the international monetary system is largely dependent on the effective cooperation of a relatively small number of countries; but it serves the interests of all.” Most of the Governors from industrial countries addressed a large part of their statements to this question, and many Governors from developing countries also indicated its importance to them. There was also general agreement that the international monetary system required sufficient international liquidity to enable countries to settle their international accounts without being forced to resort to harmful domestic monetary policies, but that liquidity should not be so plentiful as to obviate the need for corrective policies to ensure that balance of payments deficits are kept within reasonable bounds. Within this broad area of agreement, as well as in the area of what surplus and deficit countries could do to improve the world’s balance of payments, there was what the Managing Director referred to as “a stimulating divergence of views.”

Opinions generally centered upon two views which differed in their emphasis on the effects of the present international monetary system and methods for improving it. One view was that operation of the gold exchange standard, under which national reserves are held not only in gold but also in reserve currencies, in the words of Mr. M. W. Holtrop, Governor for the Netherlands, “imparted an inflationary bias to the international monetary system” by causing the supply of reserves to outstrip the demand. This tendency, in the view of Mr. Giscard d’Estaing, Governor of the Bank for France, stemmed from the ability “of the reserve currency countries to finance lasting balance of payments deficits . . . without the adequate corrective mechanisms being necessarily implemented in due time.” Governors supporting this general view tended to emphasize the obligation of deficit countries to restore equilibrium; Mr. Karl Blessing, Governor for the Federal Republic of Germany, stated that “even countries with sound monetary policies have to import inflation if other countries do not maintain sufficient monetary discipline.” Governors expressing this view, while they supported a general increase in Fund quotas as one means of strengthening the international monetary system, indicated their doubts as to its “evident and urgent need” and stressed the importance of containing such an increase within “moderate” limits of some 25 per cent. They stressed the role of gold in the system, and felt that “the obligation to pay 25 per cent of the increase in quota in gold should be maintained.” With varying degrees of emphasis they supported the proposal of the Group of Ten for “multilateral surveillance” of their balance of payments positions, Mr. Giscard d’Estaing feeling that it would provide “the means of avoiding the misuses which may occur within the framework of the gold exchange standard.” If, over a longer run, it were necessary to create further international reserves, “cautious regulations would be required in order to assess the need for such a creation and to adjust its amount. The group of those with whom would rest the responsibility and burden for such operations should act in close cooperation with the Fund and with due regard to the interest of the world community as a whole.”

Some of the problems under discussion were viewed in a different light by Mr. Reginald Maudling, Governor for the United Kingdom, who doubted “that the imbalance in world payments . . . has been aggravated by the workings of the gold exchange standard,” or that “the sources of that imbalance lie solely in conditions of inflation in the deficit countries.” He felt that it “could hardly be to the advantage of the world economy if the debtor countries were forced to assume the whole burden of adjustment. . . .” Mr. Douglas Dillon, Governor for the United States, noting that the bulk of increases in reserves in recent years had flowed to a few of the industrial countries, and particularly to Western Europe, thought that further increases would only add to that flow “unless and until those countries reduce their chronic surpluses through a relative rise in imports, an increase in their capital exports, or any other acceptable combination of actions that would overcome their propensity to absorb whatever new liquidity may be added to the system in the form of owned reserves.” He gave special support to that part of the report of the Group of Ten which foresaw the possibility of long-term loans by countries with large reserves to other industrial countries, and to the suggestion in the Fund Report and in that of the Group of Ten that Fund quota subscriptions should be so handled as “to mitigate the repercussions of gold payments on the gold reserves of the contributing members and of the reserve centers that may be affected.”

These Governors cited the advantages of ensuring the adequacy of liquidity through international credit arrangements. Mr. Dillon noted that the period during which U.S. payments deficits were the principal source of additions to reserves of other countries was coming to an end as the United States was moving toward balance in its payments; he thought that it was “as important today to shift the emphasis toward credit as it was in the first years after World War II,” when the United States supplied dollars through “massive credits and grants.” Mr. Maudling did not believe “that adjustments in domestic economic conditions leading to improved international balance would come about quickly and smoothly if only the role of gold were strengthened, and if the only fresh supply of owned reserves allowed in the principal industrial countries in addition to gold was a strictly limited amount of some new form of reserve asset distributed to that restricted group of countries on some uniform basis without regard to their present payments position. I think indeed,” he said, “there is danger in too much emphasis on owned reserves as opposed to credit facilities. In the Fund, we have a system which operates by making available to deficit countries on a temporary basis the currencies of surplus countries. I believe that, for many purposes, such a system may be the most suitable and flexible instrument.” While recognizing the need to guard against an excess of liquidity, he felt that the main duty was “to see that the supply of liquidity both in its amount and in its distribution is such as to ensure that no unnecessary brake is placed on the proper expansion of the world economy. For surely, when all is said and done, this is what the International Monetary Fund exists to do.”

Mr. Schweitzer recognized in his opening address that concern about international liquidity was basic to the Fund’s objectives of high employment, adequate economic growth with reasonable price stability, and freedom from restrictions of trade and payments. While he did not wish to anticipate the outcome of further studies of liquidity, he gave his strongest personal support to these two general propositions contained in the Annual Report of the Executive Directors: first, that proposals for the reform of the international monetary system should be considered in the context of the need for orderly development, recognizing the benefits of the existing system; and second, that the advantages of a multilateral institutional approach should be kept in mind when considering the question of the creation or administration of international liquidity.

Noting that the Executive Directors had concluded that there was a case for an increase in Fund quotas, Mr. Schweitzer stated, “I strongly feel that an increase in the quotas of Fund members at an early date is, at the present time, both justified and necessary. . . .” During the discussions, he proposed the adoption of a resolution whereby the Governors would call upon the Executive Directors to “proceed to consider the question of adjusting the quotas of members of the Fund and at an early date submit an appropriate proposal to the Board of Governors.” This resolution was unanimously adopted at the end of the Fund’s discussions.

In his final statement, Mr. Schweitzer found it particularly heartening that the multilateral institutional approach was given widespread support. A large number of members had emphasized, in varying degrees, the need to take such further steps as might be desirable to strengthen international liquidity within the framework of the Fund rather than on a more restricted basis. Noting that the views of countries were naturally influenced not only by the stage of development in which they found themselves but also by many other factors, he continued: “For example, countries that are plagued by surpluses in their balances of payments are, for obvious reasons, more inclined to consider the supply of international liquidity to be adequate than are those whose balances of payments have tended to be in deficit.” He did not feel that, in the industrial world as a whole, it could be said that recent years had been characterized by a marked degree of excess demand. While it was true that some industrial countries had experienced an uncomfortable degree of inflationary pressure, he doubted “if much of this can properly be attributed to their payments surpluses, or to the payments deficits of other countries, or even to those features of the international monetary system which have made such payments deficits somewhat easier to finance.” He recognized, further, that it was “of great importance to ensure that measures of financing are always closely associated with the application of corrective policies to ensure that deficits are kept within reasonable bounds. What has come to be called ‘multilateral surveillance’ is something to which I give my full support, were it only because surveillance, and even discipline, on a truly multilateral basis has long been part and parcel of the Fund’s system of operations.”

Mr. Schweitzer welcomed “the broad measure of support which Governors have given to the proposal that there should be a general increase in quotas. The unanimous adoption of the quota resolution will allow us to go ahead rapidly with our work on this question. … I am confident we shall be able to submit concrete proposals to governments with the minimum of delay.”

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