T.W.H. Eckersley and Peter C. Hole
THE MAIN THEMES of the Fund Annual Meeting were referred to by President Lyndon B. Johnson of the United States in his address at the opening joint session. In this he described 1968 as “a year of crisis in financial markets,” and the special drawing rights facility as a “major step in international financial cooperation.” Many Fund Governors returned to the theme that the containment of the potentially disruptive consequences of the events of the past year was due chiefly to a remarkable degree of international cooperation and collaboration. However, while much progress had thereby been made toward restoring international monetary stability, a recurrent theme throughout the discussions was that there was no cause for complacency.
Special Drawing Rights
Mr. Pierre-Paul Schweitzer, Managing Director of the Fund, found overwhelming support for the view, expressed in his opening address, that it was a “matter of importance for the strength of the international monetary system that the facility [for special drawing rights] should be established with minimum delay.” This would require acceptance of the proposed Amendment to the Articles of Agreement by at least three fifths of the members, having four fifths of the voting power. In addition, before the scheme could become operational, instruments of participation in the special drawing account would have to be deposited by members having at least 75 per cent of the total quotas in the Fund. Many Governors expressed pleasure in reporting that the legal procedures for accepting the Amendment and certifying participation by their countries were well advanced.
The opinion was also widely expressed that the events of the past few months, the present international monetary situation, and future prospects fully justified the activation of the proposed scheme at the earliest possible opportunity. Noting that the first decision to allocate special drawing rights would depend, inter alia, on the collective judgment that there was a global need to supplement reserves, Mr. Emilio Colombo, Governor for Italy, observed that “this judgment cannot but be influenced by factors such as the drop in world monetary gold, the decrease in the ratio of reserves to total world imports, and the increased propensity to resort to credit rather than use owned resources.” However, Mr. François Xavier Ortoli, Governor of the Bank for France, reiterated his Government’s position that one of the essential conditions precedent to the first allocation was the restoration of equilibrium in the balance of payments of reserve currency countries.
The proposed facility was generally acclaimed as a necessary and important mechanism for regulating international liquidity. But it was also apparent that many speakers felt that more consideration might have been given, in the provisions of the Amendment, both to the special liquidity needs of the developing countries and to their requirements for development finance—points that had already been raised during the 1967 Meeting in Rio de Janeiro. In particular, many Governors from developing countries expressed reservations about the proposed basis for allocating special drawing rights, which, in their view, would mainly benefit the industrial countries. Accordingly, considerable attention was focused on the possibility of establishing some connection between the creation of international liquidity and the provision of development finance, and various suggestions were made about the possible form of such a “link.” The Governor for the Philippines, Mr. Alfonso Calalang, and the Governor of the Bank for the United Arab Republic, Mr. Hassan Abbas Zaki, put forward the idea of revising the quotas of developing countries. The Alternate Governor of the Bank for Israel, Mr. Jacob Arnon, suggested that part of any allocation might consist of a fixed and uniform amount to be allotted to each participant, with the remainder varying according to existing, or revised, quotas; the Governor of the Bank for Afghanistan, Mr. M.E. Ziyaie, also favored such a solution. Mr. Cherif Belkacem, Governor of the Bank for Algeria, proposed that participating countries might place the national currency counterpart of their allocations of special drawing rights at the disposal of the World Bank and the International Development Association (IDA). However, the most popular suggestion in this context was that there might be some form of pledge by the main industrial countries to use part of their reserves, corresponding to a portion of their special drawing rights allocations, to replenish the IDA or to subscribe for World Bank bonds.
In addition, the Governor for Venezuela, Mr. Benito Raul Losada, expressed the feelings of many Governors when he said “… anyone who imagines that this facility can suffice to meet the liquidity needs of the monetary system is guilty of overoptimism; one ought not, therefore, to disregard future requirements of conditional liquidity, especially those deriving from an increase in the Fund’s ordinary resources.” Governor Zaki, the Governors of the Bank for the Sudan (Mr. Hussein el Sherif el Hindi) and for Pakistan (Mr. N.M. Uquaili), and the Governor for Zambia (Mr. E.H.K. Mudenda) suggested liberalizing the terms on which the developing countries might make use of the Fund’s resources. The Governor for Korea (Mr. Jong Ryul Whang), the Alternate Governor for Ceylon (Mr. William Tennekoon), and the Governor of the Bank for Indonesia (Mr. Ali Wardhana) called for improvements in the scheme for Compensatory Financing of Export Fluctuations.
Role of Gold
The role and marketing of gold was another subject which received wide attention. It was universally recognized that special drawing rights would only supplement, and not supplant, existing reserve assets, and that gold would continue to play a major role in the international monetary system. A more controversial aspect, however, concerned arrangements for marketing gold. Many Governors considered that the agreement, reached in Washington on March 17 by central bank representatives of the active gold pool countries, to maintain an official price for gold while allowing the free market price to fluctuate and to withhold sales of gold from official stocks to the free market, had been a wise one. In their view, the two-tier system that had emerged had worked well both in arresting the decline of monetary gold reserves and in insulating the international monetary system from the destabilizing influences of speculation in the private gold market.
However, this approbation was partly offset by misgivings about certain aspects of the arrangements. For example, several Governors observed that although the two-tier system had staved off the immediate crisis, the underlying pressures on the monetary system—stemming from the balance of payments deficits of the reserve currency countries—still persisted. In addition, Mr. Nicolaas Diederichs, Governor of the Fund and Bank for South Africa, submitted that “to the extent that the system in its extreme form—i.e., the two-circuit system—seeks to prevent the entry of newly mined gold into monetary reserves, it not only provides no basic solution to the world’s monetary problems but… tends to aggravate them…. Surely some continuing increase in official gold reserves would be more conducive to international monetary stability than a scheme which expressly attempts to make such an increase impossible.”
One point which received particular emphasis from many speakers on this matter was that the present uncertainties in the operation of the new arrangements should be cleared up without delay. In this connection, several Governors expressed the view that the Fund should reaffirm its obligation under the Articles of Agreement to purchase gold at the official price from members who wished to obtain the currency of other members. However, several other Governors thought that it would not be compatible with the Fund’s objectives to buy any amount of gold offered to it in every circumstance. Mr. Karl Schiller, Governor of the Bank for Germany, thought that it would be reasonable “if the Fund were, in future, prepared to purchase gold, under certain safeguards and limitations, if the gold price fails to or below $35 an ounce. Only purchases of nationally produced new gold should be excepted from this rule.” Mr. J. Zijlstra, Governor for the Netherlands, believed that the policy on gold purchases should be directed toward reinforcing confidence in the maintenance of the monetary price for gold of $35 an ounce, as the entire international monetary system was hinged on this price. In his view, this would be possible only if a “working arrangement” were agreed upon.
The Basle Facility
Under the Basle Facility, the United Kingdom is able to draw up to $2,000 million of foreign currencies from the Bank for International Settlements as and to the extent that the sterling balances of the overseas sterling area fall below an agreed starting level. The facility has a ten-year life from September 9, 1968; drawings may be made during the first three years and the net amount ultimately drawn will have to be repaid between the sixth and tenth years. Besides the BIS, participating countries are Austria, Belgium, Canada, Denmark, Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, and the United States.
The United Kingdom has made complementary agreements with overseas sterling area countries whereby the United Kingdom guarantees, in terms of the U.S. dollar, that part of each country’s official sterling reserves which exceeds 10 per cent of its total reserves. The guarantee is conditional on each country maintaining at all times a minimum sterling proportion in its reserves. The main elements in these agreements, which are to last for three years, are uniform for all sterling area countries.
Governors referred to the devaluation of sterling as one of the major events of the year. Governor Calalang suggested that investigation be made of ways in which countries might diversify their foreign currency holdings with a view to minimizing their losses on devaluation of one reserve currency in relation to another. The Basle facility and the agreements between the United Kingdom and other sterling area countries were welcomed. Mr. Roy Jenkins, Governor for the United Kingdom, stated: “It may take a little time for people to realize the radical transformation which has been achieved by the Basle arrangements, but once this has been recognized, I believe that we need not again fear a flight from our currency and the contingent threat to the international monetary system.” Governor Colombo appealed for harmonization of the reserve policies of the major industrial countries, so as to narrow differences in the proportions of their reserves held in the form of gold. He also believed that a scheme whereby the Fund issued special reserve assets against deposits of reserve currencies merited examination. However, Governor Zijlstra warned that: “We must avoid stacking one experiment on top of another. In a tranquil atmosphere confidence should be built up on the basis of existing foundations.”
Balance of Payments Adjustment
As in previous years, many speakers underlined the fundamental importance of a successful balance of payments adjustment process for the smooth functioning of the international monetary system and the steady expansion of world economic activity and trade. This matter assumed special importance, however, at the 1968 Annual Meeting because of the concern that many Governors felt about the possible impact on commodity prices and world demand of the corrective measures being taken by the United States and the United Kingdom. While it was reassuring that these countries were making determined and sustained efforts to cope with their payments problems, several Governors emphasized that the developing countries stood to lose more if the main emphasis of the adjustment efforts was on monetary policy. Governor Uquaili pointed out that “such a policy would, on the one hand, reduce the spontaneous movement of private capital to the developing countries, and on the other, aggravate their debt-servicing problems by causing a rise in the general level of interest rates.” In a similar vein, Governor Wolfgang Schmitz of Austria stressed that both fiscal policy and so-called incomes policy should have their share in the process, and he cautioned that resort to exchange controls or similar direct measures was certainly no alternative.
Moreover, there was virtually unanimous recognition of the fact that the maintenance of satisfactory growth in world trade would require expansionary policies on the part of industrial nations with balance of payments surpluses and strong reserve positions. Governor Jenkins observed that “the importance of this to the developing countries, whose exports depend so heavily on the growth of demand in the developed world, can hardly be exaggerated.” Mr. R.D. Muldoon, Governor for New Zealand, said that “the surplus countries must be prepared to accept a check to the increase in their reserves and the possibility of loss of reserves without taking countermeasures.”
In the light of this widespread expression of concern, it was significant, as the Managing Director remarked in his closing statement, that a number of Governors for countries which play a major role in the world economy were able to give assurances that their economic policies were being framed with the above mentioned considerations in mind.
Stabilization of Commodity Prices
Governors dwelt at length on the problem of the stabilization of the prices of primary products; all agreed that this was a matter of great concern to the developing countries. In the words of the Governor for Spain, Mr. Faustino García Moneó, “the utmost importance attaches to the work done so far by the Fund, in cooperation with the World Bank, in studying and resolving the problem of stabilizing prices of primary products. The short-term fluctuations in these prices and the long-range trend in real terms of trade, which is unfavorable for the producing countries, must be remedied if true international equilibrium is to be achieved.”
Governor Ziyaie and the Governor of the Fund and Bank for Trinidad and Tobago (Mr. F.C. Prevatt) were among those who called not only for stabilization but also for long-run efforts to improve the export opportunities of the primary producing countries. Governor Muldoon and Mr. Kiro Gligorov, Governor for Yugoslavia, said that such efforts would be made easier by the modification of the agricultural policies of certain developed countries. Furthermore, the Joint Chairman of the Boards, Mr. U.B. Wanninayake, of Ceylon, deplored, in his opening address, the tendency which he observed in some countries “toward a build-up in protectionist sentiment and toward preferential systems of a narrow type.” He feared that the threats of new quota restrictions and retaliatory action could not entirely be dismissed as journalistic license.
“It is well that the Bank and Fund staffs have broken new ground in working together on this difficult problem and it is urgently necessary that both become more involved in this area in the future”; this opinion of Mr. Henry H. Fowler, Governor of the Fund and Bank for the United States, summarized the general feeling of the Governors on commodity price stabilization. However, although Governors praised the first part of the staff’s study of the problem, many regretted that the second part was not yet available for discussion. Some felt that the nature of the ideas which had been considered was too modest: “Our general impression,” remarked Mr. D.N. Ndegwa, Governor for Kenya, “is that the approach taken in most of the memoranda is too timid and may concentrate more on the analysis of difficulties involved than on proposals for new remedies.” Several Governors favored Fund involvement in the financing of buffer stock schemes. Governor Ortoli suggested a network of individual commodity arrangements, with provision in each case for appropriate mechanisms for stabilization and for price fixing at reasonable and remunerative levels; he believed that the Fund, within the framework of its present Articles, could contribute to such arrangements. However, several Governors felt that possible solutions might, in the words of the Alternate for Malaysia, Mr. Ismail Bin Mohamed Ali, “have to go beyond the confines set by the Articles of Agreement of the Fund and the Bank.” Some Governors called for further amendment of the Articles, while others suggested the creation of a new agency. It was the view of Mr. William McMahon, Governor of the Fund and Bank for Australia, that the resources of the Fund and Bank should be put to uses which were within their proper field of responsibilities. A further note of caution was sounded by Governor Schiller, who stressed that lasting solutions had to be kept in line with market forces and that “international buffer stocks can be justified economically only if they serve to neutralize short-term fluctuations.”
Emphasizing the urgency of the matter, the Governors for 14 African countries and for France had earlier urged that the date for completion of this work should be the end of 1968. Other Governors, however, believed that the staff and Executive Directors needed ample time to prepare sound solutions to what were generally considered rather intractable problems, and the Board of Governors finally requested the staff to continue its work on the problem and asked Executive Directors to submit the remainder of the study and their comments or recommendations not later than June 30, 1969.
Distribution from Fund’s Income
For the first time the Board of Governors voted to distribute part of the Fund’s net income; it was decided that some $37 million should be paid to the 33 member countries with creditor positions in the Fund. In support of this decision, the Governor of the Fund and Bank for Canada, Mr. Edgar J. Benson, remarked that it would improve the status of creditor positions in the Fund as reserve assets and would increase the willingness of members to have their currencies used in Fund drawings. Mr. Louis Pascal Nègre, Governor for Mali, had also proposed on behalf of 39 Governors that the members benefitting from this distribution should examine the possibility of assigning their share to the replenishment of the resources of the IDA. A number of other Governors had supported this suggestion, including those for France and Yugoslavia; others said that the functions and resources of the Fund should be kept distinct from those of the Bank Group. In the end, it was decided to proceed with the distribution of this income without expressing a view as to how it might be used by recipients.
Drawing together the main themes of the Meeting, the Managing Director in his closing speech underlined the need for renewed efforts on a comprehensive front to speed the process of development. He said that the Fund would continue to assist not only through the provision of financial resources to support policies designed to establish a sound basis for economic growth but also through its consultations and its rapidly expanding work in the field of technical assistance. He hoped that, in conformity with the purposes and provisions of the Articles, the Fund would find it possible to make a soundly conceived contribution toward arrangements for ironing out disruptive fluctuations in commodity prices. Stressing that the outcome of all these efforts turned upon the smooth functioning of the international payments and adjustment process, the Managing Director said that the special drawing rights facility was a most important advance. He believed that, in their comments on gold, Governors had recognized not only the major role the metal played, and would continue to play, in the international monetary system, but also the need for all countries to stand ready to make their contribution to a satisfactory solution of the gold question.