From a speech by Dr. Ormar Emminger, Member of the Board of Governors of the Deutsche Bundesbank, delivered at the European Luncheon Club of the British Council of the European Movement, London, on January 25.
IN SEPTEMBER 1965 the Finance Ministers and Central Bank Governors of the ten most important industrial countries, the so-called Group of Ten, asked their Deputies to determine ‘what basis of agreement can be reached on improvements needed in the international monetary system, including arrangements for the future creation of reserve assets, as and when needed.’
“In the sixteen months that have elapsed since then, the Group of Ten has gone a long way towards finding a possible basis for the future evolution of the international monetary system—although there has been no lack of difficulties and setbacks on the way….
“If we want to be realistic, we have to envisage the continuance of a large volume of dollar and sterling reserves into the future, and also into a new international reserve system comprising some deliberately created new reserve asset. This poses the problem of coexistence between currency reserves and other reserve assets, and with it the problem of the stability of such a system. This problem could be solved, or at least greatly eased, by establishing a reserve system whereby a new reserve asset would be provided not only in order to add to existing international liquidity in case of need, but also in order to compensate for any shrinking of international liquidity resulting from a decline in currency reserves.
“We may also imagine more pragmatic solutions. There are already now some features in our present system which point in this direction. One is the gradual assumption of a sort of collective responsibility of a group of strong countries for fluctuations in reserve currency holdings, primarily those fluctuations whose origin lies not in the balance of payments of the reserve center, but in outside factors. I refer to the network of swap facilities up to a limit of $4.5 billion that exist between the American Federal Reserve System and a number of other central banks. Another example is the swap arrangements conducted in June 1966 by a number of central banks with the Bank of England in support of the pound sterling, arrangements which are directly related to movements in the British reserves arising out of fluctuations in the sterling balances. I refer also to the General Arrangements to Borrow (GAB) with the IMF which have set up a currency pool of $6 billion in order to compensate, in case of need, large-scale movements of funds between the major countries. These General Arrangements to Borrow were really the origin of the Group of Ten.
“As a counterpart to this emerging common responsibility of a group of countries for the stability of our international reserve system, there is the system of ‘multilateral surveillance’ of our reserve system, as exercised, at present, jointly by the Central Bank Governors assembled at the regular Basle meetings and by the Working Party 3 of the OECD, which in essence is an affiliate of the Group of Ten. This ‘multilateral surveillance’ is intended to cover all the major aspects of reserve creation and reserve policies, and it could easily be developed, in a pragmatic and flexible way, so as to shield our reserve currency system from the risks of instability arising out of the coexistence of various kinds of reserve instruments.
“These are admittedly very pragmatic solutions; or rather embryonic beginnings which over time may lead to a sort of collective management of our international reserve system. As the famous English financier, Walter Bagehot, said, scarcely a hundred years ago: ‘Money does not manage itself.’ It must, indeed, be managed by human intelligence and foresight. President Kennedy, a few months before his tragic death, expressed this same thought in a famous speech in Frankfurt, my home town, when he said: ‘The great free nations of the world must take control of our monetary problems if these problems are not to take control of us.’”
From a speech by Henry H. Fowler, Secretary of the United States Treasury, delivered at the Monetary Conference of the American Bankers Association, at Pebble Beach, California, on March 17.
THE U.S. balance of payments, and programs designed to affect it, must be viewed in several perspectives.
“Whether enjoying surpluses or coping with deficits, the U. S. balance of payments adjustment process has become a key element in the political, military, diplomatic and international economic policies of the United States and of major concern to the world at large. This is true for several reasons:
First, the key role of the United States in free world security, trade, exchange and economic development;
Second, the important role of United States generated capital, public and private, and the business activity that flows from it, in many countries outside the United States;
Third, the special position of the dollar as a reserve and transaction currency on a worldwide scale, making it the keystone of the international monetary system on which free world trade and development depend.
“Another perspective is the long series of deficits in U. S. payments. Beginning in 1958, rising claims upon our gold stock signaled the end of the world’s almost total postwar dependence upon the dollar, the increasing strength, desirability and convertibility of other currencies, and the availability of sufficient dollars in foreign official holdings to permit a shift in the mix of monetary reserves in favor of gold.
“The series of heavy deficits in the three years 1958-60, averaging $3.7 billion per year, on the ‘liquidity’ basis, and accompanied by gold outflows averaging nearly $1.7 billion per year, signaled the need for a program to bring U.S. payments into substantial equilibrium.
“Beginning in 1961 the U. S. Government initiated a series of measures to reduce the deficit without disrupting trade and travel, and without abandoning its key role in free world security and development.
“This effort was thrown off target by at least four developments, each transitory and somewhat unpredictable:
- The Berlin crises with the necessary force build-up in 1961-62;
- A sharp upswing in the levels of private foreign borrowing in 1962 and 1963;
- A sharp increase in private capital outflows between 1962 and 1964;
- The rapid increase in military foreign exchange costs in late 1965 and in 1966 resulting from stepped-up military operations in Southeast Asia.
“Despite these adverse developments the deficit, measured on a liquidity basis, fell from the average of $3.7 billion in the years 1958-60 to an average of $2.5 billion in the years 1961 through 1964. In 1965 and 1966 it was further reduced to $1.3 billion and $1.4 billion, respectively. This occurred despite an increase during that time in net military expenditures outside the United States because of Viet-Nam costs exceeding $950 million and a decrease in our trade surplus from the peak level of 1964 by $1.9 billion in 1965 and by $3 billion in 1966.
“On the official settlements basis, there was an average deficit of $0.5 billion in 1965-66, compared to $2.2 billion in the preceding five years.
“I am not going to dwell today on the short-term or temporary measures being used to restrain or moderate private capital flows. We are relying on them to keep our deficit under control during the period of our special commitments in Southeast Asia, the period required to realize the benefits of our long-range program.
“There is already too much emphasis in public discussion on this holding operation, tending to obscure both the existence and strategy of the long-range program we are employing in the balance of payments adjustment process.
“That program—for coming into, and maintaining, a sustainable equilibrium—is essentially a long-term one, aimed at solving the problem
- —not by a resort to restrictions or withdrawals that are damaging to free world security, trade, exchange and development
- —but by making use of this nation’s unexampled economic strength in the context from which that strength has been derived: competitive free enterprise.
“The success of this strategy and program, it should be understood by all concerned here and in other countries, depends importantly on (1) an open, competitive and cooperative international economic order and (2) substantially strengthened multilateral arrangements to ensure the financial viability of programs for free world security and aid to developing nations.
“I continue to find it necessary and relevant to emphasize to my colleagues from other countries that the way in which this nation handles its balance of payments problem depends in large measure on the cooperation it receives from other countries in the process, and upon the way in which other important financial nations act in dealing with their own domestic and international monetary problems. I find it also necessary to emphasize that this cooperation is not a matter of helping the U. S. deal with its problem but a matter of enabling the United States to deal with its problem without: undermining the international monetary system, subjecting that system, by unilateral action, to radical and undesirable change; or withdrawing from commitments involving the security and development of others.
“The United States’ long-term balance of payments objective—stated most simply—is to reach and sustain the degree of equilibrium necessary to preserve confidence in the stability of the dollar, both as a transaction and as a reserve currency.”
From a speech by Sir Leslie O’Brien, Governor of the Bank of England, delivered at the Overseas Bankers’ Club, London, on January 30.
“CENTRAL BANK GOVERNORS, myself included, have for some long time been uttering warnings about the dangers of undue reliance by many countries on credit restraint and monetary policy. The reduction of interest rates all round is something which central bank governors earnestly desire. But no one can lower interest rates simply by ordaining that this shall be so. If it were attempted we should merely find, as a distinguished British economist said a few years ago, that having thrown interest rates out of the door they could not be prevented from coming back through the window.
“In this field, as elsewhere, it is no use suppressing the symptoms without tackling the disease. The level of interest rates reflects the facts of life—the over-all levels of demand in different countries; the rates of inflation; the pace of expansion of government expenditure; the balance in applying restraint between fiscal and monetary policies; the nature of the systems of taxation; the interrelations between different countries’ balances of payments; world-wide trends in the supply of capital and the demand for it: the list, of course, is endless.
“There can be no simple answer to the question of how high any country’s rates should be at a particular time. But if finance ministers wish to change the present situation, and indeed only they can do so, their most important contribution will be to change appropriately the balance of their internal policies and in particular to get government expenditure under proper control.”
From a speech by P.C. Bhattacharyya, Governor of the Reserve Bank of India, delivered at the Conference on Industrial Development, Calcutta, on December 20, 1966.
“I SHOULD LIKE to say that the nature and character of the industrialization process in developing countries today are much different from those of the countries which developed during the nineteenth century. During that period, the industrialization process was gradual, dependent as it was on the evolution that took place in industrial technology. The costs of this gradual industrialization were much less as industries were less capital intensive than they are at present. Further, the resources for financing industrial development were partly available from the large agricultural sector, which experienced a pace of technical change and development more or less comparable to the industrial development in the United Kingdom. The rapid agricultural development in countries like the United States of America, Canada, Sweden and Japan provided not only resources in the shape of a much-needed expansion in exports of agricultural commodities but also the markets for the industrial sector.
“In the developing countries today, none of these favorable factors prevail. Because of vast technological developments and the large size and indivisible character of investments in infrastructure, the costs of industrialization are much larger than they were during the gradual process of industrialization during the nineteenth century. Moreover, the possibilities of obtaining resources from agricultural expansion that existed during the nineteenth century are no longer there; in most of the developing countries, the agricultural sector has to be financed from resources obtained in the industrial sector. Again, unlike the nineteenth century, these countries are not in a position to tap markets for their industrial consumer goods in the other countries.
“The problems in the present-day developing countries are further aggravated because of the population explosion and the egalitarian pressures. With regard to both these factors, the situation during the nineteenth century was much more favorable for the process of industrial capital formation. Further, the nature and relative magnitude of international private capital flows during the nineteenth century were much more favorable.
“Thus in the present-day world, developing countries face a formidable combination of difficulties. In our case the position has become particularly difficult during the last four years or so when a combination of external factors has caused serious upsets.”