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Views and Comment

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1965
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Mr. Pierre-Paul Schweitzer, Managing Director of the International Monetary Fund, from a speech delivered in London on February 1, 1965

“I do believe that it is urgent that we press ahead with the development of ideas in this field and with the negotiations that will be necessary to reach agreement on these new ideas. I base this view on a conviction that in the last two years much more progress has been made than is generally realized in the thinking on the question of liquidity. Public focus on areas of disagreement has concealed a most important development: an emerging consensus among the international community that the creation of international liquidity, like the creation of domestic liquidity, should become a matter of deliberate decision.

“This consensus is, I believe, a natural further step in the evolution of the world’s thinking about monetary arrangements. Many years have now elapsed since individual countries decided to free their domestic money supplies from the automatism of the gold standard and to attain some degree of freedom, in managing their internal economies, from fluctuations in the balance of payments. It is widely recognized that gold reserve requirements are no longer a necessary condition for monetary discipline, and I endorse this view. The discipline of the external position is always present, as it should be, to encourage the correction of persistent imbalances. To carry the concept of monetary management to the international level is a major step forward. Important gains of this character, however, often take years to penetrate the thinking of the world at large. I think that the process of realization would be most effectively speeded up if the agreement in principle were followed by some action—even though the magnitude of any initial action were not in itself such as to add any large sums to the existing total of international liquidity. Indeed, I could not think of any more effective answer to those who advocate an increase in the official price of gold than for the nations, as a deliberate act of international policy, to agree on practical ways to enlarge the present stock of world reserves. The modest increase in quotas on which the Fund is at present engaged is practical evidence of the willingness of countries to cooperate in the creation of liquidity.”

Dr. H. J. Witteveen, Minister of Finance of the Netherlands, before Parliament on February 9, 1965

“Another question is whether a European reserve currency could be created to play a role in international payments similar to that played by the pound and the dollar. One might see something attractive in that idea.

“People are asking: ‘Why cannot the EEC play a similar part with the United States, now that the EEC has become economically stronger and has acquired a certain status?’ I believe I am justified in saying that for one thing establishing a European reserve currency would be no easy matter and that in many respects it would not be desirable at all. It would be no easy matter because the role of the dollar in international payments was not created overnight either, but evolved by a natural process. I do not believe that present conditions in the EEC already favour the evolution of a uniform European currency into an international reserve. The EEC is still a long way from having acquired the banker’s function that the United States has. In fact, there is no question of anyone saying at international discussions or conferences: ‘Let us create a European reserve currency.’ Far from it! But I would go further. I believe it would be definitely undesirable, when reorganizing the international payments system and trying to find the right form, to attempt to establish a European reserve currency to function in the same way as the dollar and the pound sterling have done, because that would not eliminate the disadvantages of the system. On the contrary, the disadvantages would be multiplied ….

“In spite of all the conflicts that one hears of in connection with the discussions (on international monetary matters), I should like to emphasize that, as far as I can see, agreement has already been reached on a number of fundamental points. To begin with, there is agreement on a point that is very important in itself, viz., that there will probably be a real need for a new form of international liquidity. It is realized that the part played by gold is restricted and that gold stocks will be incapable of growing sufficiently to meet the probable future requirements of world trade. It is also realized that the function of the dollar has, in a way, reached its natural limit …. The second point of agreement is that the new international liquidity would have to be created deliberately to meet the future needs of world trade. The third is that the creation of liquidities should no longer depend on fortuitous positions of balances of payments ….”

President Johnson, in a message submitted to Congress on February 10, 1965, reviewing the United States’ balance of payments and gold position

“The measures I have proposed in this message will hasten our progress toward international balance without damage to our security abroad or our prosperity at home. But our international monetary responsibilities will not end with our deficit. Healthy growth of the free world economy requires orderly but continuing expansion of the world’s monetary reserves.

“During the past decade, our deficits have helped to meet that need. The flow of deficit dollars into foreign central banks has made up about half of the increase in free world reserves. As we eliminate that flow, a shortage of reserves could emerge. We need to continue our work on the development of supplementary sources of reserves to head off that threat. And we need to perfect our mechanisms for making international credit available to countries suffering from balance of payments difficulties—on terms that will assure orderly correction of imbalances without forcing deflation on deficit countries or inflation on surplus countries.

“To go back to a system based on gold alone—to the system which brought us all to disaster in the early 1930’s—is not an answer the world will, or should, accept. Rather we must build on the system we now have, a system which has served the world well during the past 20 years.

“We have already made an excellent start. Our short-term defenses against speculative crises have proved their strength and flexibility. The proposed increase in IMF quotas is a constructive forward step. Further, for some time we have been jointly exploring with our major trading partners how best to create new reserve assets that will be available if needed to supplement gold and dollars.

“We must press forward with our studies and beyond, to action—evolving arrangements which will continue to meet the needs of a fast growing world economy. Unless we make timely progress, international monetary difficulties will exercise a stubborn and increasingly frustrating drag on our policies for prosperity and progress at home and throughout the world.”

M. Giscard d’Estaing, Minister of Finance of France, in a speech delivered in Paris on February 11, 1965

“What are the criteria that enable us to judge the value of the international monetary system? There are, I believe, four criteria, the first of which is to determine whether it properly serves the reciprocal interests of the countries involved.

“The second criterion is to find out if it permits the proper operation of the adjustment machinery, that is to say, if it leads the countries to restore the equilibrium of their balance of payments, when it has been upset.

“The third condition which it must satisfy is to provide the world with sufficient liquid assets to meet all payments and world economic expansion.

“Lastly, the fourth quality, with which I shall conclude, is that it must be a sound system ….

“I am, therefore, going to state the French proposals with regard to reform of the international monetary system, which are four in number: the first is a formal, unequivocal declaration by the large States that henceforth they will settle their deficits through direct payments in gold as General de Gaulle indicated and no longer by creating additional currency reserves, the amount of which has already been universally considered adequate. Failing such a clear, unequivocal declaration that, beginning with January 1 of this year, they will no longer finance their own deficits through the issuance of additional currency, there is reason to fear that the present uncertainties will be prolonged and become greater.

“Our second proposal is to retain only the means specified in the international agreements in effect, that is, the Bretton Woods Agreement and the Paris Agreement, for the financing of deficits of a basic nature. Our third proposal is to make the reform of the monetary system as it now exists the prerequisite for any call for new resources. Lastly, our fourth proposal is that this reform be worked out jointly by the countries concerned in accordance with the following principles:

“First, the settlement of balances in the balance of payments may be made between central banks only by means of payments in gold.

“Next, the central banks may hold only two elements as reserves: gold and what are called ‘possessed reserves’ which are themselves deducted from gold, to the exclusion of any foreign exchange exceeding the normal amounts required for current transactions.

“Then, it is advisable to provide for the progressive elimination of the surplus amounts of reserve currencies now being held, beginning by taking action to ensure that the conditions for the use of these reserves can no longer be profitable for those who hold them, so as to put an end to the preference which they may now enjoy. Along with this reabsorption of the surplus amounts of reserve currencies there could be a gradual repayment of the debts which originated in financial aid.

“Upon completion of that elimination of the surplus amounts of reserve currencies, the currencies of all the countries that have international financial responsibilities would together become convertible into gold as far as the central banks are concerned.

“Lastly, objectively ascertaining that there is insufficient liquidity in the world, an insufficiency which might appear particularly at the time of the reabsorption of the surplus amounts of foreign exchange, could lead to the throwing in of additional possessed reserves deducted from gold in accordance with terms and conditions to be defined.

“Those are our proposals regarding the reform of the international monetary system. From now on, with regard to its line of action France will abide by the principles I have just set forth.”

Seventh Report on the Activities of the Monetary Committee of the European Economic Community, dated February 12, 1965

“… Lastly, the Committee feels it must stress the importance it attaches to the constitution of a study group to examine various proposals regarding the creation of reserve assets either through the International Monetary Fund or otherwise. It feels that this study is all the more important since there is no immediate prospect of a currency of one of the six countries assuming the function of an international reserve currency. Indeed, at the present junction such a development could raise problems without substantially strengthening the international monetary system.”

Herr Karl Blessing, President of the German Federal Bank, in a speech given in Zurich on March 8, 1965

“The system of the gold exchange standard, under which the monetary reserves of the different countries are composed partly of gold and partly of currencies—mainly dollars—certainly has defects. This has already been noted by the Group of Ten in its last year’s report. In spite of these defects, however, the present monetary system has made possible an expansion of world trade and an increase in the standard of living greater than any in the world’s history. This should not be forgotten in the face of the criticism now being levelled at it ….

“The German Federal Bank is in full agreement with their French friends that ways and means must be found to put an end to the creeping inflation of the post-war period, to which the deficits of the reserve currency countries have undoubtedly also contributed. It also agrees that the creation of fresh international liquidity must be linked with strict, multilaterally controlled rules ….

“The German Federal Bank’s standpoint differs from the French not in the goal, but in the method. In the German view the gold exchange standard could be improved and tightened so that it forms an efficient international monetary system. As already said on several previous occasions, an arrangement can be conceived, for example, whereby the countries in the Group of Ten would all undertake gradually to harmonize their monetary reserves so that they hold, say, two-thirds in gold and one-third in currencies and the deficit countries settle their deficits as to, say, two-thirds in gold and one-third in currencies, while surplus countries would receive two-thirds of their balance of payments surpluses in gold and one-third in currencies. A ratio of three-quarters gold and one-quarter currencies would also be possible. Should the ratio adopted prove to be too large or too small from the viewpoint of international liquidity, it could be modified accordingly. All this would result in a tightening-up and a sort of codification of the present gold exchange standard and restore at least partly the discipline of the gold standard ….

“The aforesaid proposal is intended to be evolutionary and not revolutionary. The prevailing opinion is that, with today’s international price structure, the existing supply of gold is too small for gold to act as a monetary basis and that new production of gold would be inadequate to cover liquidity requirements if world trade expanded. A way therefore needs to be found of creating in the correct balance the international liquidity that will be necessary in the future. The French would like to do this in a more revolutionary way, namely by abolishing the gold exchange standard, returning to the gold standard and creating the composite reserve unit, whereas it is the German view that the gold exchange standard can be used for the desired end, provided it is appropriately reorganized. The defects of the gold exchange standard lie not in the system itself but in its application, in particular in the excessive creation of dollar reserves as a result of persistent U.S. balance of payments deficits ….

“A return to the gold standard in the form of the gold bullion standard, as has been suggested in certain quarters, would even in the opinion of most of its original proponents only be possible if the gold price were drastically raised. All the Governments and central banks in the Group of Ten are agreed that an increase in the gold price is completely out of the question ….”

Mr. Robert Marjolin, Vice President of the Commission of the European Economic Community, before the European Parliament in Strasbourg on March 23, 1965

“The expression ‘gold standard’ has been used in several different senses, among which it is essential to distinguish. Certain persons, who in any case do not occupy positions of responsibility in the conduct of public affairs, consider that it means a pure and simple return to the monetary machinery that existed before the First World War, which was characterized by the almost exclusive use of gold in international payments with, as a result, a serious and rapid deflation in a debtor country which did not possess large reserves. This is a system which we rule out.

“For others the gold standard, which could also be called the reformed gold exchange standard, means a return to a stricter monetary system and to the ideas which underlay the Bretton Woods agreements made during the Second World War.

“These ideas affirm the primacy of gold in the final financing of balance of payments imbalances, but accept the maintaining, and perhaps even the widening, of international credit facilities provided these facilities do not in practice remove all need for the debtor country to take the necessary steps to ensure the speediest possible return to equilibrium. This would mean maintaining the machinery of monetary cooperation represented by the International Monetary Fund, the Group of Ten, and the short-term credits which central banks make available to each other.

“These ideas do not, however, allow the future accumulation by the central banks of large surpluses in foreign currency.

“The Executive Commission is inclined to share these ideas. The weaknesses of the gold exchange standard, as applied at present, are now universally recognized, and it appears that the arbitrary creation of international liquidity, not in accordance with the needs of international trade but following disequilibrium in the balance of payments of this or that country, has now reached a limit which it would be dangerous to exceed.”

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