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Views and Comment

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1965
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Mr. Pierre-Paul Schweitzer, Managing Director of the International Monetary Fund, at the Institut d’Etudes Bancaires et Financières, Paris, June 2, 1965, spoke as follows

“To the extent that deficits of the great trading countries are settled by increases in foreign holdings of their currencies, new liquidity is created. It is more and more widely recognized that this practice is becoming inadequate as a method of ensuring an adequate growth in world reserves…. While I see an important role to be played by reserve currencies, this does not mean that they should continue to be relied upon as a major source of reserves for future needs. … It seems unlikely that the growth in reserves from gold production and from the accumulation of reserve currencies will suffice to meet the growing need for reserves that may be expected to occur as international transactions continue to increase.

“There is wide agreement that there is no urgent need for additional international liquidity. However, the situation would alter if the measures recently taken to strengthen the balance of payments of the United Kingdom, and even more importantly of the United States, are successful. … In dealing with matters such as this, which are vitally important to millions of people, it is always prudent to have agreed on a course of action well before the need itself arises….

“To create additional liquidity, the Fund could allow countries to draw with the same degree of freedom some amount of the quota beyond the gold tranche; or the Fund could expand the reserve positions of countries in the Fund by acquiring certain special assets, of a type which it does not hold at present; and, to finance these assets, it could issue loan claims to countries that would be prepared to add to their reserves in this form.

“The new reserves which the Fund could thus create could be given features that would make them qualify as reserve assets of central banks, together with gold and the major reserve currencies….

“The primary issues to be decided are essentially these: (1) How can an equitable distribution be achieved of the additional purchasing power that is created by any international action to increase liquidity, and (2) how can the decision on these questions be made in a manner that adequately takes account of the varying interests of countries? …”

Dr. Guido Carli, Governor of the Bank of Italy, delivered an address at the Ordinary General Meeting of Shareholders, May 31, 1965, in which he made the following points

The international monetary system works well as a counter to speculative attacks against the currency of a country which is bringing its balance of payments back into equilibrium. The obligation to seek out and eliminate the system’s deficiencies is not removed, however. The most serious defect is usually considered to be that the creation of international liquidity derives mainly from the U.S. balance of payments deficit. The magnitude of the deficit and its partial financing through purchase of dollars against national currencies by European central banks is generally regarded as, possibly, the most important reason for the inflationary trend in the European countries.

While approving the principle of mutual assistance in the international monetary system, one may see possibilities for the development of the present monetary system which would require that reserves continue to consist of gold and a fiduciary element. The size of the fiduciary element should not be tied to the vicissitudes of the balance of payments of individual countries, but should be regulated according to the needs of world trade, and its creation should be subject to multilateral surveillance.

The indispensable prerequisite for any progress toward closer monetary integration among individual countries and toward any reform of the international monetary system involves a common policy on the management of foreign exchange reserves. A common policy would include a pledge by central banks to finance balance of payments surpluses or deficits by observing an agreed ratio between gold and reserve currencies which would prevent the creation of the fiduciary component of international liquidity being left to the discretion of the countries issuing reserve currencies. At the same time, changes in the gold-reserve currency ratio would enable the volume of the fiduciary component to be adapted to the needs of international liquidity. The financing of payments deficits by means of credits would be limited to the amount of each country’s quota in the International Monetary Fund.

Dr. M. W. Holtrop, Chairman of the Board of Directors of the Bank for International Settlements, spoke at the thirty-fifth Annual General Meeting of the Bank held in Basle, Switzerland, June 14, 1965. He said, in part,

“Exigencies of external equilibrium demand that in countries facing a persistent deficit unit costs of production should go down so as to make them more competitive, interest rates should go up so as to discourage capital outflow or induce capital inflow, and monetary policies should be restrictive so as to make resources available for export.

“The decision or the U.S. Government, in February of this year, to initiate a program of voluntary controls over capital exports, which seems to be meeting with considerable success, for the time being obviates the difficult choice of instruments of policy that might be used for reducing the interest gap. Nevertheless, while the immediate outlook is improved, it does not seem safe to rely on direct controls for too long. Further efforts to improve the basic situation by appropriate policies in both deficit and surplus countries would therefore be desirable.

“The quest for policies conducive to international equilibrium seems of greater urgency than international monetary reform. The immediate outlook before us is not of any shortage of liquidity but of improving the adjustment process for correcting the main deficit and surplus positions. If there could be an assurance that the persistent disequilibria of recent years were at an end, then an atmosphere would prevail in which a solution for any longer-term shortage of liquidity could be found.”

M. Giscard d’Estaing, Minister of Finance of France, delivered an address before the Institut d’Etudes Bancaires et Financières, Paris, June 16, 1965, which was reported by the press as follows

The French Minister stressed that it should not be up to the countries with balance of payments deficits to assess and determine alone the amount of liquidities needed, and that it was imperative to give up a reasoning inspired by the deficit. Gold is the “foundation of the monetary edifice” and “must remain at the center of the system,” because it is the only “objective factor in the absence of an international monetary authority.” However, while gold should assure the stability of the system, gold alone was not sufficient, and some additional means must be found. A substantial increase in the price of gold would not solve all the problems and “would even have serious un-desired effects.”

He thought the proposals made by the Managing Director of the Fund would put countries with hard currencies on the same basis as others. Moreover, these proposals would lead to a confusion of two operations which ought to be distinct—the creation of extra money and the financing of payments deficits. French experts, he said, favored three ideas for a “renovated” international monetary system. These included continued use of the present system of “conditional credit facilities” of the Fund, and improvement of the process of redistribution of reserves through such mechanisms as foreign loans on the capital markets of creditor countries. A third possibility would be the creation of additional monetary means. He deemed it desirable that the major countries that play the basic role in the monetary operations of the world should meet quickly to find a solution for the problem of international liquidity.

Frederick L. Deming, Under Secretary of the U.S. Treasury for Monetary Affairs, spoke at the Annual Convention of the Washington State Bankers’ Association, Takoma, Washington, June 22, 1965, saying, in part,

“All in all, leaving aside direct investment, some $4 billion of United States capital moved out last year. About half went to Canada and Japan, less than a quarter directly to Western Europe, and the remainder to Latin America, Asia, and other regions. The reductions we anticipate from the programs now in effect, particularly when the impact is directed toward the other industrial countries, should form a relatively small part of the total investment financed in those countries. … The relationship of this correction of our deficit to world business activity is marginal and should not be over-stressed. … It is certainly true that some adjustments will need to be made in these countries.

“As and when our balance of payments shows continuing strength, some of the uncertainties that have to date surrounded the liquidity problem should begin to clear. The essential questions that will have to be answered are: What will be the reserve needs of the world? How much will the major industrial countries require in the form of gold, and what will they be willing to take into their reserves in addition to gold?

“There are a number of technical possibilities for creating additional reserve assets. One method, frequently mentioned, is the further extension of the technique of reciprocal acquisition of currencies, as in the short-term swaps of the Federal Reserve, but for a long term. Each country then regards its claim on the other partner as a reserve asset. The countries could also issue special securities to each other, with appropriate provisions as to maturity, interest rates and exchange protection. Another approach would be a further evolution of the present reserve claims on the International Monetary Fund…. Other suggestions have been made involving more restrictive procedures, both as to participation and governing rules….

“A consensus may not emerge easily or quickly. For the world has to date relied essentially on gold and reserve currencies, and the public everywhere tends to be cautious and pragmatic in monetary matters.”

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