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The Fund Meeting

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1970
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By Tony Helm and John Kay

The speeches of Fund interest at the 1970 Annual Meetings in Copenhagen (where all sessions were held jointly with the World Bank Group) in the main reflected the comparative calm that had existed in the major financial markets of the world during the previous year. The Bretton Woods system, liquidity, inflation, trade policies, and the needs of the developing countries—in fact, the matters of outstanding concern in the economic and financial worlds—were the themes under discussion. As the Chairman, Mr. Hédi Nouira, said in his concluding remarks, the Meetings permitted Governors to consider certain approaches to outstanding problems and the aims of the two institutions.

The Bretton Woods System

The Governors, who had before them a report by the Executive Directors on the Role of Exchange Rates in the Adjustment of International Payments, generally considered it a valuable contribution to the existing knowledge of the adjustment process. Its main conclusions, with which the speakers on the whole agreed, were that the basic principles of the Bretton Woods system of stable but not rigid exchange rates were sound and should be maintained and strengthened, but that certain modifications in the system might be worth further consideration provided that they did not weaken the existing arrangements. There was some divergence of views as to the amount of flexibility that was desirable.

Arguing for stability, Mr. Valéry Giscard d’Estaing, Bank Governor for France, noted that “We [the French authorities] remain faithful to the spirit, and even more truly to the inspiration, of the Bretton Woods charter …. Greater flexibility would weaken the will to protect currencies against inflation. . . Why should we fight to the death when it seems that an avenue of escape is constantly open to us?” On the other hand, Mr. David M. Kennedy, Governor for the United States, noted that the report of the Executive Directors on The Role of Exchange Rates seemed to recognize that “. . . there are circumstances in which more flexible techniques and practices, within the general context of the Bretton Woods system, could make a practical and useful contribution to maintaining the basic conditions for free trade and orderly markets.” Many Governors from developing countries reminded the Governors of their more developed partners that, as Mr. E.H.K. Mudenda, Governor for Zambia, explained, “. . . the developing countries should be assured of the relative stability of exchange rates.”

In a different context. Baron Snoy et d’Oppuers, Bank Governor for Belgium, reported that the EEC countries were seriously considering coming together in an economic and monetary union. Thus, “any flexibility could only exist outside this system, and, furthermore, [the members’] position in response to any external flexibility will necessarily be a common one.”

Possible Modifications to the System

Governors discussed at some length the suggestions that had been considered by the Executive Directors for possible modifications to the present system. There was a fairly general agreement that the suggestions for the introduction of either “floating rates” or “crawling pegs” could be too destabilizing. In fact, Mr. Diógenes H. Fernández, Governor for the Dominican Republic,1 felt strongly that “A system of freely floating exchange rates would not be acceptable as a general system. Nor is a system of automatic and continuous adjustments in par values in accordance with certain indices, i.e., a crawling peg, to be recommended, as no mechanical procedures can be used to identify a fundamental disequilibrium.” In the same vein, Mr. Anthony Barber, Governor for the United Kingdom, criticized the school that advocated floating rates.

In dealing with some of the other suggestions made in the report on The Role of Exchange Rates, some Governors argued that the adoption of wider margins around parity would introduce more uncertainty into financial affairs and add to the cost of international trade to the detriment of the poorer countries, especially primary producers, while others suggested that Fund members might derive certain benefits, such as a reduction in the amount of official intervention in the market, from wider margins. Concerning smaller and prompter changes in parity, the views of Governors on the substantive aspects of the proposal offered a wide spectrum from acceptance to complete rejection.

The issue of exchange rate adjustment was further commented on by some Governors who stated that the present system was basically sound and that it was only through the default of individual members that strains existed. Mr. L.H.E. Bury, Governor for Australia, for instance, pointed out that “… the failure of some countries to curb inflationary processes has led to pressures on their balances of payments.” And Mr. Erik Brofoss, Governor for Norway, added: “There seems to be a general consensus of opinion that one of the main causes of the imbalance which has threatened the fabric of the international monetary system in the 1960’s has been the inadequacy of fiscal policies. . . . The Articles of Agreement ought not only to provide the Managing Director of the Fund with the discretionary authority but also to impose upon him the statutory duty to initiate discussions with national governments on the realignment of exchange rates.”

The Governors endorsed the suggestion by the Executive Directors that certain aspects of the subject should be studied further. In the words of Mr. Mario Ferrari-Aggradi, Governor for Italy, “. . . in the course of the next year the Executive Directors of the Fund [should] examine further the costs and benefits which would derive from the possible solutions which are already clearly outlined in their Report. This would allow us to reach a well thought-out and, as far as possible, unanimous decision on the future setup of the international monetary system.”

Payments and Liquidity

In general terms the feeling of the Governors was that, especially since 1969, the realignment of major European currencies had considerably eased the strains in the international monetary fabric; in particular, the flow of short-term funds between financial centers, though a continuing source of concern, had been substantially reduced. The situation in North America was in contrast. Mr. Pierre-Paul Schweitzer, Managing Director of the Fund in his opening address noted the present difficulties by saying, “In the case of Canada, upward pressure on the reserve position led to a decision last May not to maintain the exchange rate for the Canadian dollar in accordance with the Articles of Agreement; I trust, however, that an effective par value will be resumed at the earliest possible date.” Furthermore, the need to rectify the U.S. payments position had been termed by the Annual Report “the most urgent remaining task in the field of international payments.”

Some time was spent by Governors discussing the working of the Special Drawing Account. Many of them felt, after almost one year of experience, that the participating countries had made prudent use of the new facility, which had generally been treated as a reserve asset equal to the other traditional components of reserves. Some reservations were, however, made in relation to the new facility. Mr. H.J. Witteveen, Bank Governor for the Netherlands, noted, for example, that “If, however, the unforeseen inflationary developments should continue during the rest of the present basic period, we will have to take these into account when it comes to starting the next basic period in order to restore the desired long-term trend of world reserves.” Several Governors recognized that the U.S. payments position might have the effect of limiting the creation of further special drawing rights. The sustained deliberate creation of unconditional liquidity through the Fund, they felt, depended on containing the payments deficits of the reserve centers. Regarding the distribution of special drawing rights, some speakers from developing countries suggested that the allocation arrangements were not entirely equitable. Mr. Mohammed Aman, Bank Governor for Afghanistan, for instance, remarked that “. . . we are especially concerned about the rigidity of the formula for allocating the special drawing rights. It appears to us that the developed countries, rather than the developing countries, benefit the most from this rigidity.”

So far as the gold component of liquidity was concerned, the Fund’s agreement with South Africa was felt to have helped to stabilize the bullion markets; Mr. Nicolaas Diederichs, Governor for South Africa, said, “I still consider that the best interests of world finance would be served by permitting the free flow into monetary reserves of their strongest element, namely, gold …. At the same time, many important monetary authorities continue to demonstrate that they have as great a preference for gold over other reserve assets as ever—the recent large gold sale by the Fund bears eloquent testimony to this.” Another view was expressed by Mr. Kuo-Hwa Yu, Governor for China, who said: “But even the institution of the [SDR] system helped to take the wind out of rampant gold speculation, thus contributing directly to the maintenance of world financial stability.”

The future role of the Fund in connection with the world monetary system was mentioned on several occasions. Mr. Takeo Fukuda, Governor for Japan, said that “. . . I am convinced that the international monetary system will move forward in the direction of an internationally managed currency system. This point I have stressed on previous occasions in relation to SDR’s and the Fund quota increase.”

Inflation

“What is perhaps more disturbing is that pressure on costs and prices has, if anything, increased in 1970, in many cases against a background of deflationary policies,” Mr. R.D. Muldoon, Governor for New Zealand, noted. Many Governors clearly considered that world price instability was a major problem, to be solved through international as well as national efforts in the coming months. Not only was inflation regarded as socially unjust and psychologically destructive; it was also causing a resurgence of nationalistic policies, which acted to the disadvantage of the economically weaker member countries. In relation to the last point, Mr. Fernández described Latin American experience as follows: “Protectionist measures, a leveling off of aid, barriers restricting access to capital markets, an increase in the cost of money, a slackening in the flow of private capital, and a rise in the cost of imports: these, in short, have been the consequences for Latin America of this inflationary process.”

Mr. Wolfgang Schmitz, Governor for Austria, described the growing general willingness to resign oneself to living with creeping inflation. “Sometimes,” he said, “one hears stabilization efforts hailed as successful when all that they have achieved is an inflation rate which is no longer increasing. Today, I see a great danger in being satisfied if the rate of inflation in one’s own country does not exceed that in one’s most important trading partners.”

Mr. Barber, moreover, stressed that “A general climate of inflation in the world injures the developing countries in special ways. Not only is the real value to them of aid and investment flows reduced, but they suffer from the correspondingly high level of world interest rates . . . . Meanwhile they find the prices of manufactures they import continually increasing. So there can be no doubt that the longer-term interests of developing countries call for greater stability of price levels.”

Many speakers referred to the role that the United States would inevitably have to play if the word-wide inflationary trend was to be checked. In his turn, Mr. Kennedy said that”. . . we fully recognize that the inflationary process in the United States, as in the world at large, is not yet under full control . . . . we are as fully aware of the danger of too fast expansion and renewed overheating as we were of deep recession.” The point was repeated throughout the Meetings that, while the U.S. authorities had made some progress in stabilizing internal prices, further efforts were required. It was also emphasized by many Governors that the developed countries as a whole ought to pay more attention to combating inflation in their own economies.

More specifically, Mr. Fukuda commented that “. . . since cost-push factors have greatly contributed to the present inflation, it is more necessary than before to enforce selective policy measures in a most timely and adequate way.” Moreover, the attitude of both employers and employees was seen to have exacerbated the situation. As Mr. Ali Wardhana, Bank Governor for Indonesia, noted, “. . . the matter is one of how to handle imperfect competition in which human beings are involved; it is perhaps more a social and political problem rather than an economic problem.”

Mr. Karl Schiller, Bank Governor for Germany, noted that both internal and external measures could be taken by national governments to check inflation. In this connection, Mr. Edgar J. Benson, Bank Governor for Canada, explained his country’s exchange rate action as stemming from Canada’s anti-inflationary policies. “We believed,” he said, “that any further efforts to maintain this fixed rate [of 92.5 U.S. cents] would have had serious consequences . . . Further reserve accumulation could not have been prevented from bringing about further monetary expansion . . . this we were most reluctant to permit because—like the Fund—we attach very great importance to the restoration of price stability.”

On the domestic side, incomes policies were felt to be a useful supplement to monetary and fiscal policies, but not a substitute for them. Nevertheless, Mr. Alberto Monreal Luque, Bank Governor for Spain, remarked that “. . . . bringing increases in earnings into line with the average growth of productivity will probably be the major problem of the 1970’s for industrial societies, and its solution will require of those responsible for economic policy a large measure of imagination and political resolve.”

Development and the “Link”

The desirability of a link between special drawing rights and development finance was a topic that called forth comment from Governors expressing many shades of opinion. No consensus emerged. Governors from developing countries urged that some link should be forged, while others were less convinced.

Mr. F.C. Prevatt, Governor for Trinidad and Tobago, said that “We are convinced of the practicability and the usefulness of implementing a link between the special drawing rights and the provision of additional development finance on concessional terms . . . . we would urge that this study [of the link] be done in good time so as to permit a decision by the Board of Governors in 1972.” Mr. Albert Ndele, Governor for the Democratic Republic of Congo, put the case for a link on behalf of the developing countries even more strongly, arguing that “. . . the industrial countries cannot obtain the expected surplus unless they are prepared to finance the deficit of the less developed countries without thereby excessively aggravating those countries’ burden of debt, either by transferring existing savings to the developing countries or by creating new instruments of payment for their use.” And Mr. Hassan Abbas Zaki, Bank Governor for the United Arab Republic, observed that other groups had considered some such arrangement desirable; in particular, the United Nations General Assembly had asked for consideration at an early date of the possibility of establishing such a link after the activation of special drawing rights.

Mr. Y.B. Chavan, Governor for India, remarked that the Fund was not an ordinary credit organization. Suggestions for further improvement of the return on creditor positions would not be in consonance with the conception and character of the Fund. On the contrary, he believed the time had come when the Fund should use a part of its resources and accruing net income for investment in an international instrument, such as World Bank bonds.

Among those who took a less enthusiastic view, Mr. Bury said, “I do think we should remember that the Fund is in the balance of payments business and the Bank is in the development finance business and we may weaken both if we get their functions confused.” The problems of forming a link were pointed out by Mr. Witteveen as follows: “. . . there is a fundamental difference between development aid and liquidity creation. Real resources are necessary for development. My country has already approached a target of devoting 1 per cent of its net income to public aid. These real resources can be made available only by taxes or savings. The provision of additional liquidity through a scheme of mutual shortterm credit cannot, however, meet the development need. Consequently, I cannot see any logical link between aid and the creation of liquidity.”

Mr. Aman believed that the Fund’s monetary experts should study alternative methods for allocating special drawing rights. One possibility would be to continue the present system of computation based on quotas, but to make available a double allocation of special drawing rights for developing countries.

The question whether or not the allocation of special drawing rights for development finance purposes would be inflationary was closely examined. Mr. David Horowitz, Bank Governor for Israel, thought that it would not. “. . . the very fact that these SDR’s are anyway being created invalidates the argument that this would be inflationary,” he said. “In all modesty, it seems to me that the opposite is true . . .” Mr. C.N. Isong, Governor for Nigeria, made a more general comment on the same theme: “Some of the objections to this link do not take into account the long-term political and economic stability of the developing nations. In the final analysis, when the demands of the developing nations are seen against the spectrum of world events, the link between the SDR system and development finance would be found to be desirable.”

In the light of these rather opposing views, the Managing Director said that he felt sure that the Executive Directors would wish to give careful consideration to the Fund’s program of work in the field of special drawing rights.

Trade and Aid Problems

The trade policies of member countries received perhaps more mention than they have at recent Annual Meetings. Mr. Kennedy, in particular, referred to the dangers of faltering on the path to freer trade in these words: “The danger is that we all could be swept into a self-defeating spiral of efforts to defend particular interests. The only answer can be to reassert—forcefully and widely—the primacy of our strong mutual interest in freer and multilateral trade.”

Many members, it was pointed out by other speakers, imposed restrictions on trade of one type or another instead of resolving the underlying payments difficulties. Despite the increase in world trade, barriers to access of both primary products and manufactured goods from developing countries to markets in industrial countries seemed to be increasing. Mr. P. A. Reid, Bank Governor for Guyana, warned that there was a possibility that, as a result of the lack of access to markets, developing countries could be relegated to the permanent status of primary producers with subsequent losses of employment opportunities.

Another trade problem affecting primary producing countries in particular was the low level of, and fluctuations in, the prices received for their commodities. Tun Tan Siew Sin, Bank Governor for Malaysia, commented that the “terms of trade which are so overwhelmingly loaded against the developing world will continue to impoverish them . . . All we want is fair terms of trade, a square deal. I do not think we are asking for too much or seeking something which is unreasonable. The alternative is a mad rush on the part of all developing countries to industrialize as much as possible and as rapidly as possible.” Several speakers discussed the lack of effectiveness of international commodity agreements and commented on the working of the Fund’s compensatory financing facility. For instance, Mr. Abdoulaye Lamana,2 Governor for Chad, expressed a view shared by others when he said “… we have welcomed the improvements made in the compensatory financing mechanism with a view to assisting member countries to participate in buffer stock arrangements. Without any doubt this is a positive step forward. However, it involves such limitations, as concerns its bases and methods, that we cannot see that it represents an effective or lasting solution in providing the necessary regulation of prices for raw materials.”

Deflationary Policies

Deflationary policies adopted by industrial countries were seen by Governors to have the effect of reducing the demand for goods from primary producing and developing countries. Mr. Yu, for instance, noted that “… abrupt economic decisions of the key industrial countries are liable to reverberate through the fabric of the economy of all nations. The effect, I may add, is particularly serious to the economies of those developing countries whose industries are beginning to develop.” The other major consequence of deflationary policies implemented by developed countries concerned interest rates. For example, Mr. Fernandez considered that the reason for the climb in interest rates and the lessening of the flow of capital was to be found in the fact that the inflation with which the industrialized countries were afflicted had been and still was being fought largely with restrictive measures of a monetary nature. In general, there was a feeling that the adoption of stronger fiscal policies in the major countries would assist the Third World considerably.

Finally, many speakers called for a general untying of aid. While accepting the fact that private enterprise should play an important role in the development process, Mr. Brofoss said “. . . we endorse the recommendation of the recent high-level DAC meeting in Tokyo that maximum aid should be in untied form. A substantial increase in the proportion of untied aid will serve to dispel suspicion and apprehension as to ulterior motives of donor countries.” If such an increase did not take place, Mr. Mesut Erez, Bank Governor for Turkey, feared, “. . . tied aid, relatively high interest rates, and the declining trend noted recently in government aid are likely to have a negative effect on trade between both the industrialized and the developing countries.”

The Governors thus discussed, in some 60 speeches delivered over four days, the main financial and economic problems facing the Fund as it continues to pursue the purposes set out in Article I of the Fund Agreement at Bretton Woods more than a quarter century ago.

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