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Views and Comments

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1966
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Excerpts from a speech by Mr. Pierre-Paul Schweitzer, Managing Director of the International Monetary Fund, to the Federation of German Industries, Kronberg, on Germany, April 25:

It is not yet a matter of urgency to begin actually creating additional reserves. I do not foresee within the next year or two any acute crisis arising out of an increasing scarcity of international liquidity. But this does not make it any less urgent to get to grips with the problem, since international action to deal with it will, as experience has already shown, be time consuming and extend over a period much longer than that for which economic developments can be forecast. Urgency is indeed demanded for the very reason that changes in the world monetary system are universally known to be under serious discussion. We cannot afford to take the risk of unsettling foreign exchange and gold markets as a result of prolonged uncertainty over what those changes are to be. Nothing could be more beneficial than the assurance that the world was moving toward a system which, in contrast with the present one, permitted the level of international reserves to be adjusted by means of rational and conscious policy decisions….

“One suggestion which has received fairly wide support is the proposal to exclude from the distribution of reserve units all but a few leading countries, on the grounds that the others have no great use for reserves, needing rather development aid, and could therefore not be relied upon to keep any units allotted to them or achieve a progressive growth over time in their reserve holdings. A second idea is that even among the advanced, industrialized countries which did qualify for membership, there should be established a code of rules for the correction of external imbalances somewhat more strict and quick-acting than those which operate today.

“It is on the basis of these ideas that the so-called dual approach to this problem is founded. The first part of the package would be a reserve unit scheme of limited membership. Ideas vary on the precise composition of the membership, but an essential qualification in some plans would be willingness to subscribe to a set of rules of adjustment. The second part of the package would provide for countries which did not participate in the reserve creation, in recognition that these benefits could not equitably be confined to just a few rich countries. This would be done, for example, by making available a portion of the new units for the use of a body such as the Fund. The Fund in turn would use them to provide, in one way or another, additional facilities for its members.

“I sympathize with the objective which these proposals seek to achieve. As I have said, I believe that the provision of long-term resources should not be a purpose of a scheme for reserve creation. I believe, in other words, that countries which become indebted under any such scheme should recognize a responsibility to reconstitute their position. At the same time, I have grave misgivings about the methods suggested to achieve these ends, embodied in the dual approach which I have just described. In the first place, I cannot accept that all but a few members of the Fund have little or no need of reserves, and are not capable of keeping any they might receive. In our relations with our members, we have consistently told them, small countries as well as large, the importance of maintaining adequate reserves, and have stressed the problems which arise if they neglect to do so. This advice has for the most part been heeded. The developing countries as a group, excluding those few that happened to make unusual reserve gains during the war, have increased their reserves by about 80 per cent over the last decade.

“Secondly, I can see no possible basis for dividing the member countries of the Fund in an objective and’ nondiscriminatory manner into the reliable few and the less responsible many. The suggestion that countries might select themselves by their willingness to subscribe to new rules of adjustment and to submit to multilateral surveillance of their performance under these rules deserves searching and critical scrutiny. The whole experience of the Fund, which has for twenty years been in the business of advising and giving financial assistance to countries in payments difficulties, bears witness to the dangers of supposing that the universal application of predetermined rules can solve the problems. No two situations are ever identical. General principles of adjustment can, of course, be found, and are being continuously developed through and applied in our everyday relations with our members, for example in helping them to set up stabilization programs. But I think it is true to say that the more complex and diverse the economy of a country becomes, the less likely it is that preset rules can have valid application to its problems of adjustment. Paradoxically, in view of their lack of sophisticated instruments of economic control, it is the countries with the least developed economies that could most easily qualify under this test.

“It is certain that any attempt to divide the countries of the world into separate groups would be bitterly resented, and could bring grave damage to the cause of international cooperation in monetary and economic matters. This would, I think, be true even if the second part of a dual package, namely, the set-aside for countries excluded from the reserve creation itself, seemed to be generous. One of the outstanding achievements of the past twenty years has been the common commitment of all countries to avoid the destructive, beggar-my-neighbor policies prevalent in the 1930’s. It would not be wise for the main industrial countries to put in danger the continued observance of international economic regulation….

“This being said, you might be forgiven for wondering if I see any prospect at all for coming to an agreement on new monetary arrangements which could satisfy the misgivings of those who fear an uncontrolled transfer of resources. The answer is that I do; but I see the control being exercised not by limiting participation in the scheme to an exclusive group of a few industrial countries, but through the rule which would govern the use to which the newly created assets could be put. For example, countries which, by reason of deficits, had drawn on the credit tranches from the IMF might be required to apply any assets accruing to them under the scheme toward the reconstitution of their position in the Fund. This would represent a dual approach to the problem, if you like so to describe it, but a different sort of dual approach from the one I described earlier. I prefer to think of it as a universal approach, because under it all countries would receive the same nondiscriminatory treatment based on the objective facts of their financial situation.

“It would be idle to hope that the rules of a scheme for reserve creation can be drawn so as to exclude entirely the possibility of a long-term transfer of resources—and that is true whatever the composition of the group which operates the scheme. But it may be useful, in view of the fears which have been expressed, to have some idea what proportion of created liquidity would be distributed to less developed countries under a universal scheme such as I have described. On the assumption that distribution was in proportion to the size of a country’s quota in the Fund, just over one quarter would go to the less developed countries. About one half of this amount would, on the basis of the suggestion I have just made and of existing Fund positions, be repaid at once to the Fund by countries that had drawings outstanding in the credit tranches. The possibility of a long-term transfer of resources would therefore be small, perhaps no greater than in a dual scheme with a set-aside for non-participants. The set-aside, it is widely suggested, would also be in the region of one quarter. If the choice of a universal rather than a dual scheme did increase slightly the risk of a long-term transfer, it would in my opinion be a small price to pay to avoid the political and economic dangers of dividing the free world into two or more groups of countries.

“These considerations have persuaded the management and staff of the International Monetary Fund to prepare their own plans, which are being studied by the Fund’s Executive Board, and have also been discussed in the Group of Ten. We have suggested two possibilities, one a reserve unit scheme to be operated by the Fund through an affiliate on the lines which I have indicated and open to all Fund members. The other possibility would demonstrate how an almost identical result could be achieved, without the need to create special new mechanisms, by a development within the existing framework of the Fund of its policies on the use of its resources. The technical details may be of little interest to you, but in broad outline this scheme would be based on special new drawing rights in the Fund that would in practice be unconditional.

“You may wonder why we have offered two different ways of arriving at substantially the same result. We feel that in the longer run the Fund unit scheme might prove somewhat more flexible and for that reason more suited to meet the need for a reserve asset in which countries might ultimately be holding a substantial part of their total reserves. But it might be more convenient to begin in a more familiar way by means of the scheme based on drawing facilities in the Fund of an unconditional character. This scheme could be implemented without amendment of the Fund’s Articles of Agreement and is based on techniques which are already well tried in the Fund’s own experience. To start in this way might permit us to gain valuable experience on the creation of reserves and on the many issues that arise in this connection.

“We recognize that the operation on which we are seeking to embark would represent a step forward in the organization of the world’s monetary system comparable with that taken at Bretton Woods. That it could be achieved with so slight an adaptation of the instruments and operations of the Fund is indeed a tribute to the soundness of the monetary foundations which were then laid for the sound and stable growth of the world economy. Such an advance would seem to me a logical outcome of the steady improvements which have been made in man’s ability to harness the instruments of money and credit to the service of his economic progress.”

Excerpts from an abridged version of the review of economic developments and central bank policy contained in the Deutsche Bundesbank report for 1965:

During the period under review international discussion on the improvement and development of the present monetary system was concerned mainly with three problems:

  • the improvement of the adjustment process, i.e., the balance of payments policy for the correction of external disequilibria;

  • the problem of potential instability of the foreign exchange element in the present gold exchange standard;

  • the problem of an adequate—but not excessive—world supply of monetary reserves at long term (the problem of ‘international liquidity’)….

“Of the three main problems of the present international monetary discussions the third, i.e. adequate supplies of ‘international liquidity,’ seems to be the least urgent. It is true, however, that the total holdings of monetary reserves have increased only slightly in 1965, especially when the statistics are adjusted for the influence of some temporary special circumstances. It is also true that new accruals of monetary gold in the Western world have, especially owing to persistent hoarding of gold, since the beginning of 1965 dwindled to very small proportions, which alone would never suffice to meet the world’s demand for reserves in the longer run. On the other hand, however, this slow expansion of the world’s monetary reserves has by no means prevented world trade from developing extremely vigorously during the past year, and to all appearances also in the present one. Indeed, monetary expansion in the world, and especially the tendencies of prices, would seem to reflect too much of monetary ‘liquidity’ rather than too little. It therefore looks as if in the past years characterized by big U.S. balance of payments deficits the rest of the world has been supplied with monetary reserves so abundantly that it needs to grow into this somewhat ample garment.

“One thing can be said with reasonable certainty on the grounds of experiences both during the period under review and in earlier postwar years: the supplies of monetary reserves exercise no immediate short-term effects on the world economy, being of importance only on a longer-term view. A few years of relative ‘short supply’ of monetary reserves can, in the presence of reasonably intelligent international cooperation, be bridged without any difficulty by redistributing reserves out of existing holdings or by international credit facilities. In fact, the problem of world-wide replenishment with monetary reserves does not come up except on a longer-term view….

“The latest trend would seem to indicate that in future the dollar as an element in the provision of reserve assets will largely, if not entirely, drop out of the picture. Nor is it in the U.S. or international interest to expand the period of creation of reserves by U.S. balance of payments deficits any further. Finally, the noticeable unrest and concern over a possible shortage of gold in the future suggests that the world should, as soon as possible, be rein-spired with confidence to the effect that the leading countries in case of need are in a position to solve the problem of the world’s reserves in a satisfactory manner. Clearly, such a solution must not merely consist in providing the preconditions for a possible subsequent provision of reserves. It no less requires the establishment of adequate safeguards against any misuse, in such a form that the ultimate solution is capable of creating confidence in conservative financial quarters as well.

“This means that the conditions governing eventual subsequent activation of any form of ‘contingency planning’ will have to be formulated with sufficient precision. Neither political pressure nor a majority decision must be permitted to put in motion a new reserve system without genuine demand, since this would involve a risk of renewed creeping inflation. The responsibility for such an instrument must be vested in a limited group of countries with strong currencies, which are in turn prepared to submit to strict rules regarding their balance-of-payments policy and the ‘multilateral surveillance’ of their deficit financing and reserve policies. Such restriction to a limited group appears indispensable for the reason that any form of new provision of reserve assets basically in every instance means that reciprocal credit facilities or possibilities of drawing on the currencies of other members are being granted, whatever name one may choose for the new reserve facility. Nothing would be more misleading—and nothing has indeed so far misled the discussions more—than the view that this procedure was equal to a kind of donation of monetary reserves; it is this particular misunderstanding which has aroused the covetousness of some developing countries. In reality, however, the sole point at issue is the setting up of a system of reciprocal rights and duties, including the duty to make available each country’s own currency for the legitimate reserve requirements of the other countries. Such a restriction of the main responsibility to a limited group is today recognized as a general principle by all the leading countries.

“To ensure against abusive exploitation of such an instrument of reciprocal multilateral drawing facilities ought not to be overdifficult. The EPU rule, according to which this then artificially created reserve facility could only be used together with a certain proportion of gold (or U.S. dollars), might well serve as an imitable model for some new reserve facility within an extended group of countries. The central bank swap lines introduced by the Federal Reserve System in 1961 in transactions with a limited group of other central banks for a total of US$2.8 billion, which also represent a reciprocally employable unconditional ‘liquidity’—although only on a short-term basis—have so far likewise produced no discernible inflationary risk or any danger of abuse….

“The world reserve system now in operation is sufficiently flexible, especially as it is supported by close cooperation among the central banks, to be able presumably to function satisfactorily on the present basis for several years to come. On a longer view, however, some decisions will have to be faced. In the long run it will be inevitable that, as the Managing Director of the IMF stated in February 1965, ‘the creation of international liquidity, like the creation of domestic liquidity, should become a matter of deliberate decision,’ instead of being, as in the past, dependent upon fortuitous events determining the supply of monetary gold, or upon highly undesirable and inflation-promoting permanent deficits in the reserve-currency countries.”

Excerpt from a speech by Dr. Guido Carli, Governor of the Banca d’Italia. at the bank’s annual general meeting held in Rome on May 31, 1966.

It must be recalled that on several occasions, and particularly at the annual meeting of the IMF last September, the Italian authorities have made known their opinion on these problems. The numerous reform projects so far discussed take ample account of the Italian point of view as regards both principles and methods; as regards methods, in particular, it has been recognized that the creation of new reserve assets will have to be effected in close association with the Fund; that control over the creation of new assets will have to be exercised jointly by the group of countries on which falls the burden of supplying the underlying real re-sources; that the distribution of the new assets will have to be made not in proportion to gold holdings but on the basis of less arbitrary criteria and that, lastly, their utilization will have to be arranged in such a way as not to weaken the monetary discipline of the member countries.

“The premise underlying the current negotiations is the recognition, at least by the industrial countries, that there is at present no shortage of international liquidity and that before any agreement can enter into force persistent deficits in the balances of payments of the reserve-currency countries must be eliminated and the mechanism for avoiding or adjusting external disequilibria improved. It is the European countries, in particular, that are stressing this dual requirement; the French authorities, for their part, have come to the conclusion that, because these two preliminary conditions are not present, it is premature to try to reach agreement.

“The Italian authorities, on the other hand, consider that an agreement on the creation of new reserve assets, accompanied by a reinforcement of multilateral surveillance and by understandings regarding reserve-management policy, is indispensable for the stability of the international monetary system and that it is therefore in the interests of the major industrial countries to work together to reach such an agreement. Otherwise the international monetary system might evolve in such a way that the problem of the creation of new liquidity would be confused with that of aid to less developed countries, a situation which would create conditions for inflationary pressures in the world economy that would be difficult to control and would not even help those very countries that had been pressing in that direction; or there might be a break between the main industrial countries responsible for the proper functioning of the system, causing the dollar to cease to be acceptable as a reserve currency and leading to the institution of fluctuating exchange rates and thus to a disruption of the process tending towards the integration of European capital markets into a single market.”

INTERNATIONAL MONETARY PROBLEMS, 1957-63

Selected Speeches by Per Jacobsson

This volume reproduces 24 major speeches made by the late Managing Director of the Fund during his term of office. Mr. Jacobsson was an exceptionally acute observer, with unusual opportunities for seeing behind the scenes. His speeches offer a highly skilled analysis of the economic environment of those years as it developed month by month; for the student of recent history they provide valuable insights into what happened, and why. xiii + 368 pages, $2.50.

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