Payments Developments in the Industrial Area

As the Annual Report before you notes, the past year has been one of considerable disturbances in international payments among the industrial countries. A leading contribution to these disturbances has come from substantial disequilibrating international movements of capital. The acceleration of the already large outflow of capital from the United States significantly increased the deficit of the United States, and was the major factor leading to the adoption, last February, of the new program dealing with the balance of payments problems of that country. As a result of this program, the payments position of the United States was brought back much closer to balance in the first half of 1965. Nevertheless, gold sales by the United States to foreign monetary authorities increased, because some countries held larger proportions of reserves in gold than they had for a number of years, and because of increased hoarding in the world which tends to be reflected in the gold holdings of the United States as a residual supplier of gold reserves. These developments, notwithstanding offsetting reserve creation resulting from Fund transactions, contributed to a moderate fall in international reserves in the first half of this year.

Capital movements also served to aggravate the difficulties of the United Kingdom, but in this case the underlying balance of payments situation was distinctly different and required rather more comprehensive corrective measures. During the past year, the authorities in Britain have been incessantly concerned with the task of eliminating the substantial balance of payments deficit that arose in 1964. This task has been made more difficult by speculative pressures which seem, for the most part, to have taken the form of leads and lags. A wide variety of policies, including fiscal, monetary, and exchange control, have been employed and, more recently, strenuous and welcome efforts have been made to curb the growth of public expenditure and to do more in the field of incomes policy. These measures, in total, will have a considerable effect and there are already real indications that, in line with the declared objectives of the British authorities, the deficit will be much reduced this year and eliminated next year.

This series of measures demonstrates the British determination and ability to defend sterling; the international financial support given to the United Kingdom has underpinned this effort. I firmly believe it has been in the interests of the international community that sterling should be safeguarded. The Fund has played an active part in helping the British authorities in their efforts to right their position. We have had frank and almost continuous contacts with the authorities of the United Kingdom over the past year, and that country has made massive use of the Fund’s resources. Last December, the United Kingdom drew the equivalent of $1 billion, and in May 1965 drew a further $1.4 billion from the Fund; this latter drawing brought the Fund’s holdings of sterling up to 197 per cent of the British quota. We can, I think, derive considerable satisfaction from the way in which, through the Fund and otherwise, the active and timely cooperation of many countries enabled the sterling crisis to be overcome.

The drawings of the United States have until recently been “technical,” in the sense that they were explicitly for the purpose of providing currencies to be used by other countries in repurchases from the Fund through the conversion facility which the United States offered when U.S. dollars could no longer be used directly for this purpose. The United States drew the equivalent of $600 million for these purposes, of which $475 million was in the year ended April 30, 1965. In July 1965, however, the United States made a drawing of the equivalent of $300 million that was not sought on these technical grounds. This drawing occurred at a time when the U.S. balance of payments had recently improved considerably but when foreign gold purchases had nevertheless accelerated; and it helped to ease pressures on reserves.

These transactions with the United Kingdom and the United States were the dominant elements in making the period since May 1, 1964 unique in the history of the Fund. In the fiscal year ended April 30, Fund sales of currencies amounted to $1.9 billion, exceeding all previous years except one, and during the next 4 months, the Fund sold a further $1.9 billion in currencies. These $3.8 billion in drawings in a 16-month period, which, after allowing for repayments, led to an increase in outstanding drawings of $2.6 billion, put heavy pressure on the Fund’s resources. In order to limit the depletion of the Fund’s holdings of those currencies that are appropriate for use in accordance with its policies, the Fund sold $650 million in gold and borrowed $930 million in eight currencies under the General Arrangements to Borrow. At the same time, the Fund’s holdings of a number of currencies fell to a very low level. Holdings of the currencies of two of the countries whose currencies were borrowed, Germany and Italy, are now below 10 per cent of quota. Of the currencies of two other countries, which are not participants in the General Arrangements to Borrow, our present holdings are also extremely low: 4 per cent of quota in the case of Austrian schillings and 6 per cent of quota in the case of Spanish pesetas. In these circumstances, it became increasingly evident how important it is for the Fund to widen the range of currencies used under its policies, and I welcome the extension of our drawings during this year to include Australian pounds and Mexican pesos. The extension of the list of currencies regularly considered for drawings to additional countries is evidence of a trend of widening participation in world financial affairs. Until less than ten years ago, the U.S. dollar was the only currency that was regularly used in drawings, and until as recent a date as the end of 1957 nine tenths of the drawings from the Fund had been in that currency. In the next few years the use of resources for Fund transactions was broadened as some ten other currencies were also regularly drawn by members. Now the range is widening further. The progression from the earlier situation to the present one in which a wide variety of currencies is drawn is a real indication of the changing position of many members to a point where the size and strength of their economies, and the magnitude of their accumulated reserves, has made them ready and able to participate through the Fund in providing resources for countries temporarily in need of assistance, thus broadening their responsibility in the operation of the international monetary system.

Transactions with Other Countries

Even though the reserve positions of the nonindustrial countries in general have remained relatively favorable, at least until recently, a substantial number of countries had serious payments problems and more of these countries have availed themselves of financial assistance from the Fund than ever before.

This financial assistance has taken the form of both stand-by arrangements and purchase transactions. In the period since May 1, 1964, a total of $651 million was drawn by 29 nonindustrial countries, and amounts undrawn under stand-by arrangements currently in effect for 22 members total $321 million. Some of the drawings made during this period have reflected the Fund’s liberalized policy under which its resources may be used even before the establishment of a par value.

We have welcomed the opportunity to be of financial assistance to member countries whose economies are in varying stages of development, particularly as it has been associated with important efforts by the financial authorities to pursue sound economic policies. In the struggle of the developing countries to obtain progress in the welfare of their people they encounter increasingly more difficult problems within our field of endeavor. The Fund has played an active role in helping to overcome these problems as a supplier of short-term assistance, and it can expect a growing commitment to this effort.

Compensatory Financing

Another factor contributing to balance of payments difficulties, notably among primary producing countries, is that of export shortfalls. Governors will recall earlier discussions of this question, and are aware of the Executive Board Decision on compensatory financing of export fluctuations, which provided for special quota increases and set up a new drawing facility. During the past year, the Board of Governors has approved quota increases for several members under that Decision. The drawing facility has so far been used by only a few members. It so happened that the facility was introduced at a time when prices of primary products were rising and very few countries were experiencing export shortfalls. In the course of 1964, however, the price trends began to change, and it looks as though exports of the developing countries have moved into a less buoyant period, so that we expect increased use of the facility to be made in future. We are giving a good deal of thought to the problems involved in applying the compensatory financing decision and also considering what means are open to us to improve it. In this connection, we are taking into account the suggestions made to us on this subject by the United Nations Conference on Trade and Development and other bodies, and I should hope that in the not too distant future we shall be in a position to report progress.

Technical Assistance

Financial transactions between the Fund and its members are the most obvious evidence of the continuing collaboration for which the institution was created. Technical assistance has, however, always been of importance and has been rendered during consultations and in other ways. Many members have expressed a need for specialized technical assistance in the field of the Fund’s competence, and the evidence of this need led the Fund to make institutional arrangements to provide it more efficiently. I reported to you last year on the organization of the Central Banking Service, the Fiscal Affairs Department, and the IMF Institute. The Annual Report sets forth in some detail the work of these Fund facilities, and I shall touch only briefly on their activities here.

The establishment of the Central Banking Service has enabled the Fund to comply with most of the 25 requests received from 18 countries for experts to fill executive and advisory positions in the countries, or for advice on drafting new legislation, revision of existing legislation, and problems of organization and review of the over-all banking structure. The Fiscal Affairs Department, during the first 17 months of its operation, assigned six staff officers and three outside experts to technical assistance work in Africa, Asia, the Middle East, and Latin America, ranging from a few weeks to one year. Realizing the shortage of experts, and in order to avoid duplication, the Fund staff exchanges information on requests received for assistance with other international organizations active in the fiscal field. Fifty-four member countries have sent participants to the IMF Institute since it was established in May of last year. A variety of courses has been developed to meet the needs of member countries, especially the need for courses conducted in French. Particular efforts are made to attract participants from countries which have recently joined the Fund.

Restrictions on Payments

Since our last Annual Meeting, Australia and Costa Rica accepted the obligations of Article VIII of the Fund Agreement, thereby increasing to 27 the number of countries committed to the observance of the convertibility obligations of the Articles. With these additions, over 75 per cent of world trade is now conducted by countries which have accepted these obligations. During the year, there have been some further steps toward reducing dependence on restrictions. There has also been a welcome continuation of the trend toward the elimination of bilateral payments arrangements between members. We continue to regard it as an important part of our work to persuade countries to make further progress in this field.

Debt Burdens

In the Annual Report you will have noticed the particular concern expressed about the growing external debt burdens of the developing countries. This question, to which I referred last year, has increasingly absorbed the Fund’s attention, and it figured prominently in the discussions at the United Nations Conference on Trade and Development. There has been a growing number of instances where rising debt has disrupted the balance of payments, checked necessary capital inflows, and halted economic growth. We are striving to ensure that this problem is realized by countries and anticipated by responsible action and, when this fails, corrected by measures not inimical to continued expansion of international trade.

Countries receiving foreign capital should ensure that it is used prudently and in the most productive areas. At the same time, capital exporting countries have an equal responsibility to help in preventing problems of overlarge debts from arising. As I have said on several previous occasions, unrealistically short-term conditions should not be pressed on borrowers. Indeed, lengthening of the terms to the maximum extent consistent with the nature of the investment is of growing importance to the continuation of orderly development.

Some have suggested the creation of an explicit system to signal a warning when debt is increasing unduly. The objective of this proposal is understandable, but it does not go to the heart of the problem. I would rather emphasize the need for continuous review of the indebtedness of the capital importing countries. The Fund’s annual consultations have been helpful in acquainting the Fund and its members with the balance of payments situation that is emerging in debtor countries. They have also provided a suitable occasion for the authorities in the debtor countries to focus attention on the developing situation. Even countries which have established domestic machinery to keep the evolving external debt burden under scrutiny find that an annual review with an international agency can make a significant contribution to formulating policies in this field. We have, therefore, increased the attention we give to debt problems in our annual consultations with the developing countries.

Despite increasing awareness of this problem, the debt service has in certain countries risen to insupportable levels, with results of the kind I have mentioned. In several such cases, the Fund has been requested to advise the member on the way in which its problem might be met. As a result, some have adopted comprehensive programs including measures to improve government finance, to control the expansion of credit, and to improve both the competitive position of export industries and the workings of the external payments regime. For these programs to succeed, it is sometimes also necessary for the terms of existing debts to be reviewed. In such circumstances, the Fund staff, at the request of all parties concerned, has provided information on the economy and policies of the debtor country, and has also assisted it to develop suitable assurances with respect to future policies on the incurring of short-term and medium-term credit.

Cooperation with Other Institutions

In this aspect of our work of assisting our developing members, our efforts have been closely coordinated with those of the World Bank, and we look forward to growing areas of cooperation. The Bank has in the past year joined us in presenting to groups of creditor countries factual information on the debtors’ economic situation. The Bank has informed us that in order to increase its services to the developing world, it intends to increase the number of Consultative Groups and to improve their effectiveness. The Fund will cooperate in this effort by providing information in its field of competence and in other ways.

The provision of information to other international agencies has grown in importance. In part, this has been achieved through increasing staff participation in meetings reviewing country problems, notably those conducted by the Inter-American Committee on the Alliance for Progress, on developments in individual Latin American countries. I may also mention that the Fund has assigned one of its senior officers to be its resident representative in Geneva, to facilitate cooperation with the UNCTAD, as well as to facilitate the Fund’s continuing collaboration with the Contracting Parties to the GATT and other organizations based there.

International Liquidity

Mr. Chairman, I should like to conclude my review of the Fund’s recent activities with some observations on a subject to which we have allocated a major part of our time and energies during the past year: the subject of international liquidity.

It is amply evident that the subject of international liquidity and the even broader subject of the international monetary system have a vital interest for all members of the Fund. Each country knows that it is primarily responsible for the healthy evolution of its own payments position. But it should also be able to rely on the international monetary system to provide the environment within which its own efforts to maintain a sound payments position can bring success, and it knows that if the supply of liquidity is too small or too large the adverse effects will be felt throughout the whole system.

In discussing the adequacy of international liquidity, we have reached, I believe, a common understanding of the basic concepts, although we may be far from an agreed way of measuring this adequacy. Indeed, a number of conceptual points have been clear for many years, as my predecessor and I stated at greater length at earlier meetings.

First—international liquidity is needed for settlement of deficits and surpluses among monetary authorities, not to finance trade; trade is financed by banking and commercial credit. The need for international reserves is affected by the arrangements that exist among monetary authorities and it does not bear a clear and simple relation to the growth of trade.

Second—the need for international liquidity must be judged from a world point of view with emphasis on criteria such as those set out in the Fund’s purposes—among which are the expansion and balanced growth of international trade, high levels of employment, development of the productive resources of members, exchange stability, and a multilateral system of payments. The fact that some countries have deficits that they find difficult to finance is not in itself evidence of a lack of international liquidity; nor is the fact that some other countries encounter undesired surpluses and inflationary pressure evidence of an excess of international liquidity.

Third—liquidity covers a wide spectrum of means to finance payments deficits, from holdings of gold and foreign exchange to credit facilities of varying degrees of certainty. Up to a point these various forms of liquidity are substitutes for each other. For example: a quota increase in the Fund gives countries access to larger facilities of a conditional character; but because, as a result of the policies and practices of the Fund, each country knows broadly the terms on which it would be able to use this conditional liquidity, the quota increase reduces to some extent a country’s need to have reserves of its own. On the other hand, we cannot always regard the two forms of liquidity as complete substitutes for each other. In view of the complex relationships between these two types of liquidity, which may or may not be substitutes for each other, decisions with respect to them must be closely coordinated.

There is another, more technical, way in which the extension of balance of payments credits and the creation of reserves have been linked together and thus have followed from the same decisions and in the same institution. The link is that between the two sides of a balance sheet. In domestic banking, the granting of credit means the creation of money. In much the same way, the large extension of the Fund’s transactions in the last 16 months, to which I referred earlier, has also led to a large increase in countries’ reserves in the form of reserve positions in the Fund. These positions (gold tranche positions and claims under the General Arrangements to Borrow), which can be used with virtual automaticity and promptly in case of need, now amount to about $5 billion. They are recognized to be part of countries’ reserves, together with gold (about $40 billion) and foreign exchange (about $23 billion)—and they are the component of countries’ reserves that has shown the largest absolute rise since the end of 1963.

The creation of an international reserve asset has thus preceded by some years the issue that is facing us now, namely, that of the deliberate control of the creation of world reserves. The world reserve structure already contains international money in the form of claims on the Fund. Aside from questions of technique and nomenclature the questions for discussion now are, first, whether it is desirable to add to what might be called the international fiduciary component of world reserves by action not related to countries’ payments deficits and, second, whether the new reserves should also be created in the form of liabilities of the Fund.

I informed the Governors at the meeting in Tokyo that the Fund would continue its close examination of the functioning of the international monetary system. I am pleased to be able to report that during the past 12 months this has been done. The most important part of this task was to act in response to the Resolution of the Governors calling upon the Executive Directors to proceed to the Fourth Quinquennial Review of Quotas and consider the question of adjusting the quotas of members of the Fund. All Governors are familiar, I am sure, with the results of this study. Two Resolutions were presented to and approved by the Governors early this year, one to authorize a 25 per cent increase in the quotas of all members, and the other to authorize special increases in the quotas of 16 members. Members are in the process of giving their consents to these increases, and as of the latest reporting date 43 members comprising 59 per cent of quotas had done so. The Resolutions provide that individual quota increases will become effective when members having two thirds of the total quotas have consented to increases in their quotas. By a recent action the Executive Directors extended for an additional 6 months the period within which consents can be given, and I have no doubt that well within that period the necessary two thirds will be obtained.

The increase in quotas will notably strengthen the Fund’s capacity to provide assistance to members which encounter balance of payments difficulties and to supplement international liquidity. Indeed, this prospective quota increase was important among the considerations which led the Executive Directors in Chapter 2 of their Report to conclude that there was no urgent need to supplement the volume of reserves and that existing methods to create liquidity might suffice to meet the world’s need for a time. This view is enhanced by the prospect that the General Arrangements to Borrow will be extended. The Directors added to their appraisal, however, that it is important that further progress be made toward an international consensus about the way in which the international monetary system should develop. During the year the Fund staff has prepared a number of papers for the consideration of the Directors and has participated in the technical study on the creation of reserve assets prepared by a study group established by the countries participating in the General Arrangements to Borrow. The Directors, on their part, during the preparation of their Annual Report focused much of their attention on the international monetary system and international liquidity, and the result of that work appears before you in Chapter 2. Toward the end of that chapter the Directors have given some attention to reserve creation through the Fund. They have noted that the two main ways, although not necessarily the only ways, are the extension of quasi-automatic drawing facilities beyond the gold tranche into some part of the credit tranches, and an operation whereby the Fund simultaneously would obtain special assets and assume additional liabilities. It would be premature for me to attempt to elaborate on those preliminary ideas beyond the additional discussion of them which can be found in the closing paragraphs of that chapter. We have also given considerable thought to the international financial questions raised at the UNCTAD meeting, and have particularly in mind the request that the Fund review its compensatory financing facility.

We have arrived at a moment when it is important to take stock of the position of the Fund in this vital area of its work and to look ahead to the next 12 months. I should like to say something about both the stocktaking and the prospects.

I wish to begin by repeating what I said in my statement to the Governors two years ago: international liquidity is the business of the Fund. Among the major reasons why the Fund was created was to provide the means of financing countries’ balance of payments deficits, which is in effect to provide liquidity, and the evolution of the Fund’s policies and operations governing the use of its resources has been guided by the needs of members, both individually and collectively, for reserve assets. Membership in the Fund numbers more than one hundred countries; in the field of international monetary matters it has been given broad responsibilities and assets of great magnitude; it possesses a unique experience by virtue of two decades of intensive study and action. The Fund has gained this experience in dealings with both industrial and less developed countries, and under varying circumstances ranging from international crises to the long and patient efforts of individual members to achieve the stability necessary for continuing growth.

It is therefore my intention to direct the energies of the staff during the coming months to a further review and an intensive examination of the ways in which the Fund can best serve the evolving needs of members and to present the results to the Executive Directors as a basis for their consideration. At the same time, close contact will be maintained with studies which may be made elsewhere on various aspects of international liquidity. In particular, I believe it would be very useful to seek ways by which the efforts of the Executive Directors and those of the Deputies of the Group of Ten can be directed toward a consensus as to desirable lines of action. There have been recent references to the possibility of convening an international monetary conference. If it were decided to hold such a conference, I would assume that it would comprise the high financial and monetary authorities of the participating countries. This leads me to suggest that this Board of Governors would ideally serve that need.

I consider it important that certain criteria should be kept in the forefront as we carry out our analysis and our planning in this field. First, as I said a few minutes ago, the functioning of the international monetary system and the adequacy of the sources of international liquidity are matters of concern to all members. Second, new or improved facilities should be designed with the requirements of all members in mind. Third, this comprehensive approach, while it does not preclude the possibility that new facilities would be available to countries meeting reasonable and agreed tests, means that any new facilities should be available to all countries which can meet those tests. Fourth, the new facility must be so constructed as to ensure that additional liquidity is not created in a measure that would provoke an inflationary impact on the world economy, and there must be adequate safeguards to protect the quality of members’ reserves.

I have expressed today, and on a number of other occasions, my very strong conviction that the Fund is ideally and flexibly constructed to perform the new tasks and to provide the new facilities that may be found to be needed in the course of the continuing evolution of the international monetary system. The delegates at Bretton Woods did their planning on a grand scale, guided by a splendid concept. They had looked back to a period between the wars in which there had been virtually no agreed rules, no settled policies, and no pooling of resources in the strategic field of international finance. They sought to remedy these costly deficiencies, and they did so by creating the Fund and drafting its Articles of Agreement on a broad base which would include the smallest and the largest countries. It is our responsibility to hold firmly to this concept.