Presentation of the Twenty-Third Annual Report1 By the Chairman of the Executive Board and Managing Director of the International Monetary Fund


Mr. Chairman, it is once again my privilege to present to you the Annual Report of the Executive Directors of the Fund. But first I should like to associate myself with your expression of thanks to the President of the United States for his gracious words of welcome and for his inspiring remarks. I want also to join in extending the warmest greetings to all those present here today. We are particularly pleased to have with us the Governors and delegations of Botswana, Lesotho, Malta, and Mauritius, whose countries have joined the Fund since our last Annual Meeting. It is also our pleasure to welcome the representative of the People’s Republic of Southern Yemen, which has applied for membership. Swaziland, though not yet represented here, has likewise applied to become a member.

Mr. Chairman, it is once again my privilege to present to you the Annual Report of the Executive Directors of the Fund. But first I should like to associate myself with your expression of thanks to the President of the United States for his gracious words of welcome and for his inspiring remarks. I want also to join in extending the warmest greetings to all those present here today. We are particularly pleased to have with us the Governors and delegations of Botswana, Lesotho, Malta, and Mauritius, whose countries have joined the Fund since our last Annual Meeting. It is also our pleasure to welcome the representative of the People’s Republic of Southern Yemen, which has applied for membership. Swaziland, though not yet represented here, has likewise applied to become a member.

I, too, wish to say how pleased I am that Mr. McNamara is associated in our joint meetings as President of the World Bank. The Bank is indeed fortunate to have him to continue the work of his distinguished predecessors; and I am happy to say that already we have developed a close collaboration. I thank you, Mr. Chairman, for your kind reference to my own appointment to a second term as Managing Director of the Fund. I feel honored and privileged to be able to continue in my task.

Since I addressed the Board of Governors in Rio de Janeiro one year ago the world monetary system has undergone profound shocks. But the system has withstood the shocks. International monetary collaboration was severely tested on several occasions and was not found wanting. The international financial machinery is in process of being strengthened, most notably through the proposed facility in the Fund for special drawing rights. Another encouraging development is the conclusion of arrangements to give additional security to sterling balances as a form of international reserves. In the world economy, meanwhile, the pronounced slowdown that had begun in 1966 was checked; and activity picked up strongly in the second half of 1967.

The upheavals with which the international monetary system had to contend included the sequel to the devaluation of the pound sterling in November of last year. A change in the rate for a major international currency is bound to unsettle the world monetary system, but the decision to devalue the pound—however painful—was clearly justified. It was taken, moreover, after careful consideration of the effects which this measure would have on the payments of the United Kingdom and of other countries. Because of the responsible and cooperative approach to the devaluation of sterling, only a limited number of countries found it necessary to respond by adjusting their own rates of exchange. These were countries which had either close economic ties with the United Kingdom or else exchange rates calling for adjustment in any event.

In the conditions of the time, however, the U.K. devaluation deepened misgivings about the U.S. dollar and raised doubts about the stability of currencies in general. The speculative demand for gold that ensued was met by massive sales from the reserves of the active members of the London gold pool. Even these sales, totaling more than $3 billion in a period of four months, were insufficient to stem the speculative tide; and on March 17, 1968 the gold pool countries announced their decision to stop supplying gold to the private markets. Since that time the price of gold in those markets has been higher than the official price, for the most part by 10 to 15 per cent.

The Canadian dollar and the French franc, as well as the two major reserve currencies, have been subjected to serious pressures since our last meeting. Canada and France both marshaled support for their currencies from a number of sources. Both used the full amount of their unconditional drawing rights available in the Fund and encashed the claims that they had previously acquired under the General Arrangements to Borrow in transactions for the benefit of the United Kingdom. The prompt mobilization of these assets pointed up their liquidity. Canada and France also benefited from support by other central banks through swap arrangements, and both used a large proportion of their reserves in a short period. In addition, France found it necessary to introduce special measures to restrain imports and to subsidize exports. France also imposed some exchange controls, although happily these were removed within a brief period. For its part, Canada has been able to repay the full amount drawn under swaps and to reverse much of the amount it drew from the Fund.

These sharp disturbances in the international monetary system have naturally attracted much attention. But, for a truer perspective, it is necessary to look as well at some of the positive developments during the past year. A cardinal point that I want to stress in this connection is that the process of balance of payments adjustment, about whose working many of us had become disappointed, has begun to show some signs of improvement. The two main deficit countries, the United States and the United Kingdom, have taken strenuous action to remedy their payments positions. Seen from this angle, the devaluation of sterling constituted a welcome step to strengthen the competitive position of the United Kingdom. That step required the underpinning of strong fiscal measures, which were introduced in March of this year, and it will continue to need the support of firm monetary policy. On this basis there is good reason to hope that in 1969 the United Kingdom will begin to show the surplus in its balance of payments for which an anxious world has waited. In the United States a fiscal program was at last enacted in June. Already its adoption has done much for sentiment and brought a firmer tone to the dollar in the exchange markets. In a material sense, the program can be expected to moderate the expansion of demand in this country and curb inflationary tendencies; and, given an appropriate monetary posture, it should have a substantial effect on the balance of payments. Meanwhile, the mandatory measures of capital control introduced by the United States around the turn of the year are clearly exerting an influence in that the expansion of the European industrial apparatus undertaken by U.S. corporations is now being financed to a much greater extent out of European savings.

At the same time, there has been encouraging recognition on the part of the surplus countries in Western Europe of the role which they must play to bring about a better balance in international payments. These countries are set on an expansionary course notwithstanding the impact that the U.K. and U.S. measures may have on their external payments and reserves. It is entirely fitting that countries with unutilized capacity and a comfortable reserve position should pursue expansionary policies, not only in the interests of alleviating the long-standing disequilibrium in international payments but also in order to support the growth of world trade. The renewed momentum in the world economy over the past year has depended too much on the overly rapid expansion in the United States. It is vital that, as the U.S. advance slackens, those countries for which expansion is indicated on domestic and external grounds should take up the role of pacemaker. In the meantime, I am happy to note that it has recently proved possible for some leading European countries to generate a larger outward flow of long-term capital.

There is ground for satisfaction in these various indications that the world may be about to move toward better balance in international payments among the main industrial countries. But we should not overlook that these expectations are based in part on measures that in themselves are far from desirable. The improved balance will to some extent have been achieved through the maintenance and introduction of restrictions, including some of a discriminatory character. In the difficult circumstances prevailing, it was better to adopt these measures in order to promote balance than to let a situation of severe imbalance persist. But balance which leans so heavily on restrictions cannot be accepted as a satisfactory outcome in the longer term.

Less than satisfactory, too, is external balance partly achieved by reducing the flow and hardening the terms of official assistance to the developing countries. It is depressing that balance of payments considerations have been an element in retarding the growth of concessionary capital flows from some of the industrial countries. This simply shuffles on to poorer countries part of the burden of adjustment. The prospective cutback in the aid programs of the United States, which has done so much in this sphere during the postwar period, is not only unfortunate in itself but may also affect adversely the efforts of other donors. The growing propensity to tie aid, for which surplus countries especially have no excuse, is likely to dilute its quality and to complicate further the problems of the developing countries. The implications of this whole situation for their external payments and capital formation are not hard to discern. Less obvious are the retarding effects which the uncertainties surrounding official capital flows have on the liberalization of trade and payments in the developing countries. It is for governments and international organizations that have responsibilities in these areas to work continually toward the type of balance that is accompanied by the maximum freedom of trade and capital on a nondiscriminatory basis.

With respect to the outlook for the adjustment process, I should like to underscore two points. In the first place, the progressive improvement in the external positions of the United States and the United Kingdom that is essential to effective functioning of the world monetary system will require perseverance by both countries in the pursuit of appropriate adjustment policies over a prolonged period. The United Kingdom will need to run a payments surplus for a number of years in order to pay off short-term indebtedness. In the case of the United States, as well as the United Kingdom, achievement of payments equilibrium would not be truly effective or meaningful without a return to normal economic growth following the current stabilization efforts and without, in due course, the removal of capital controls. Taken together, these developments will inevitably require considerable time.

In the second place, the nature of the policy reactions by a wide range of other countries will come to assume a crucial significance during this process of readjustment. The main questions are clear. Would these other countries be willing for any lengthy period to forgo reserve increases or to incur reserve losses, which the U.S. and U.K. readjustment might well entail? Or would concern about maintaining or increasing the level of official reserves lead, after a time, to national policies that might impair the adjustment process and retard the progress of the world economy?

Such questions become all the more timely when considered in light of the trends in world reserves over the past several years. As the Annual Report points out, these trends, marked by a substantially slower accumulation of countries’ official reserves than in earlier periods, could not be expected over the longer run to provide the basis for a satisfactory performance of the world economy. In commenting on the relationship between recent trends in world reserves and a successful working of the international adjustment process, the Executive Directors concluded that “action in the area of reserve creation might well become an essential element in international cooperation aimed at achieving a lasting international payments equilibrium in a world environment of satisfactory economic growth and of resumed progress toward liberalization of current and capital transactions.” Their conclusion commands the attention of all of us who are concerned with the restoration of enduring confidence and stability in the world monetary system.

In this general context, it is apposite that during the past year further substantial progress was made in developing a mechanism to meet the need, as and when it arises, for a supplement to existing reserve assets. In Rio de Janeiro the Board of Governors approved the Outline for a facility in the Fund based on special drawing rights, and requested the Executive Directors to proceed with their work relating to the establishment of that facility and to improvements in the rules and practices of the Fund. This task proved a difficult one: although the main points had been settled in the agreed Outline, differences of view on some important issues still required reconciliation; and in any event many complex technical problems had to be resolved. Agreement was finally reached, however, and a proposal for the new facility and for reform of the Fund prepared by the Executive Directors was approved by the Board of Governors on May 31, 1968.

Governors are fully familiar with all aspects of these proposals, and I do not intend to discuss the substance of them at this time. There is one point, however, that I do want to stress. I consider it a matter of importance for the strength of the international monetary system that the new facility should be established with minimum delay. Agreement on the facility has shaped the course for a rational response in the event of a future need to supplement reserves, but to be able to make such a response it will be necessary to have the facility established. This will require acceptance of the Proposed Amendment by at least three fifths of the members of the Fund, accounting for four fifths of the total voting power. In addition, members having 75 per cent of total quotas must deposit instruments of participation in the Special Drawing Account before it can become operational. I am aware of the fact that in many countries the legal procedures for acceptance are not simple and, therefore, a certain amount of time will be necessary. Up to now, 17 countries having 42 per cent of total voting power have accepted the Proposed Amendment. I urge all member countries, whether they be small or large, to proceed as rapidly as possible to their acceptance of the Amendment and to the deposit of their instruments of participation in the Special Drawing Account.

The establishment of the facility, of course, will in no sense involve a judgment with respect to the future need for reserves. It simply sets up the mechanism whereby Fund members will proceed to supplement reserves as and when they have reached a collective decision that it is appropriate to do so. There can be little doubt that the decisions which we shall have to take under this new facility will not be easy in character. It is wholly proper, therefore, that the Proposed Amendment surrounds those decisions with strong safeguards of both a procedural and a substantive nature, including the need to take into account special considerations in connection with the first allocation.

While special drawing rights will, I expect, eventually become a major component of international reserves, it is important at this stage to do nothing to undermine, and to do whatever is possible to strengthen, the traditional reserve components. The new facility is intended, when the need arises, to supplement, not to supplant, gold and foreign exchange. This is no more than common sense. Gold is a traditional means of international settlement and a point of reference for the values of national currencies. The value of special drawing rights is guaranteed in terms of a weight of gold. More than one half of all monetary reserves consists of gold, and it continues to be the basic element in the world monetary system. It is clear also that for many practical reasons countries will always need to hold foreign exchange in their reserves; and some may find it convenient to hold a large proportion of their reserves in that form. The arrangements recently made to strengthen the sterling component of foreign exchange reserves are opportune, therefore, not only because they provide relief to the financial position of the United Kingdom but also because they give the many countries that hold their reserves in sterling a stronger asset. Once the facility for special drawing rights is operating effectively, however, the expansion of world reserves will no longer have to depend on the growth of official holdings of gold and foreign exchange.

There is little likelihood, I believe, that the magnitude of the new tasks that will be entrusted to the Fund by the Proposed Amendment will overshadow the operations and activities of the Fund as it now stands. Drawings on the Fund in the first eight months of 1968 came in aggregate to $3.3 billion, well in excess of the total for any calendar year. Of this amount, the equivalent of $2.7 billion was drawn by four industrial countries: Canada, France, the United Kingdom, and the United States. I have already noted that both Canada and France also obtained foreign currencies in respect of the claims they held under the General Arrangements to Borrow. Canada received early repayment from the Fund on balance of payments grounds and France transferred its claim—the first time such a transfer had been arranged—to a number of other participants. In a single month, June 1968, the Fund provided a number of its members with resources equivalent in all to $2.34 billion. In order to do this, the Fund not only used currencies from its holdings but also sold $547 million worth of gold and raised the equivalent of $881 million under the General Arrangements to Borrow. Thus in recent months, in situations where members needed to make large-scale use of Fund resources, the GAB again proved its value. I understand that all members that participate in the GAB are agreed that it should continue unchanged for the remainder of its second four-year period, until October 1970. I concur in this conclusion; and I appreciate the readiness of participants to apply the provisions of the GAB as effectively as possible and sometimes at very short notice.

It seems to me that the time has now come to explore, in a general way, the possibilities of borrowing by the Fund to meet situations not necessarily limited to those envisaged by the GAB. These possibilities should encompass borrowing from any member of the Fund whose currency might be needed. I see potential merit in this, not only to strengthen the liquidity of the Fund but also to give countries with large reserves an opportunity to hold an appropriate share of them in the form of reserve positions in the Fund. If such additional forms of borrowing by the Fund were found feasible and desirable, it would seem useful to establish them on a stand-by basis to ensure their ready availability in case of need.

Transactions by the Fund with countries other than the four to which I have referred were generally much smaller in amount; but they were not few in number. In the first eight months of 1968, 28 primary producing countries drew on the Fund a total amount equivalent to $567 million. In many cases these drawings were made under stand-by arrangements, of which there were 31 in effect at the end of August 1968.

For many years now the stand-by arrangement has served as a technique whereby, subject to necessary safeguards for the Fund, member countries may enjoy advance assurance that the resources of the Fund will be made promptly available in time of need to support their efforts. Over these years the stand-by arrangement has become an increasingly effective tool of collaboration between the Fund and many members in widely differing situations and circumstances. In recent months the Executive Directors have considered, in the light of continuing experience, various issues relating to the form and content of stand-by arrangements. This review, which was part of a constant process in the examination and adaptation of Fund policies, sought primarily to preserve the uniform and equitable treatment of all members. As a result, I am confident that this basic principle will be upheld without impairment of necessary flexibility.

A substantial number of the drawings by primary producing countries over the past year were made under the Decision on the Compensatory Financing of Export Fluctuations. This facility, which was introduced in the Fund in 1963 and expanded in 1966, constitutes the first instance of a Fund policy specifically addressed to the problems arising from uncertainties associated with the exports of primary products. At the last Annual Meeting, in response to an initiative by 14 African countries and France, Resolutions were adopted that requested further study by the Fund and the Bank relating to stabilization of the prices of primary products. The staffs of the two organizations have since collaborated closely to prepare, as a first stage, a general and analytical section of the study which, at the request of the Executive Directors, I have transmitted to the Board of Governors for its information. This section—Part I of the study—has benefited considerably from work already done in this field by other bodies, among them FAO and UNCTAD.

Certain additional work has been initiated by the Fund staff, including an examination, in Part II of the study, of possible courses of action by the Fund; and the staff is pursuing its work on various aspects of the problem. The Executive Directors have begun consideration of the study but are not in a position to submit comments at this time. They intend to return to this work immediately after the present meetings and to report further to the Board of Governors.

At the request of the Executive Directors, I have submitted to you, Mr. Chairman, a draft Resolution for action by the Board of Governors at these meetings. This takes note of the section of the study on primary products that has already been prepared; suggests that the staff complete its study as soon as possible, particularly by preparing a section on ways in which the Fund might assist in finding feasible solutions to the problem; and requests the Executive Directors to transmit that section to the Board of Governors, together with any comments or recommendations on the entire study and a report of any actions regarding it which they may have taken, as early as possible but not later than the Annual Meeting of 1969. I expect that, barring unforeseen difficulties, the Executive Directors will be able to transmit this material to the Board of Governors well before that meeting.

The stabilization of prices of primary products at a remunerative level is important for the economic advancement of the developing countries and the improvement of the standard of living of their populations. There is a task for constructive commodity agreements in which producing and consuming countries participate to smooth out fluctuations in supply and demand with a view to stabilizing the foreign exchange income of the producers. I believe, moreover, that the Fund, within the framework of its puiposes, can make some contribution toward this end. We shall explore precisely what the Fund can do in this area. At the same time, it is clear that the difficulties which the instability or weakness of commodity prices raises for many of the primary producing countries, in particular those where the average per capita income is relatively low, can be alleviated and overcome only through action on many fronts. For instance, the developed countries will have to reconsider policies in the commodity field which hamper the access to their markets of many primary products and thus push the problem of world supply adjustment on to other countries far less equipped to make the necessary transfer of productive resources. And, of course, there is the whole complex of issues bearing on the process of diversification and development itself, which progressively diminish the dependence of an economy on primary production.

Mr. Chairman, I began my remarks by referring to the shocks which had buffeted the international monetary system during the last 12 months. I want to end by stressing again that this troubled period was notable also for its constructive aspects. All countries have a major stake in the maintenance of a stable, smoothly functioning system; and the will to uphold this common interest has again been firmly demonstrated. That must be a source of encouragement for the future. I should be the first to recognize that we have much unfinished work on our hands. The world does not stand still and the effort to improve the monetary system which serves it is an unremitting task. Standing as it does at the heart of the system, the Fund is deeply committed to this task. The Fund has given evidence of that commitment in the past through its flexible response to the needs of the times. It will remain alert to those needs and actively explore what contribution it might make to the further strengthening of the world monetary system. Continuing attention will have to be paid to the working of the adjustment process, the long-term structure of reserves, and the role of reserve currencies within that structure. These, Mr. Chairman, are major issues for the Fund in the period ahead.


September 30, 1968.