The excellent Annual Reports of both the Bank and the Fund, further commented upon by you, Mr. Chairman, in your illuminating opening address, and by the President of the Bank and the Managing Director of the Fund in their informative statements, are like mirrors in which the events of last year are clearly and vividly reflected. The year under review was a dramatic year, highlighted by the devaluation of the pound on November 18, 1967, by the introduction of a two-price system for gold a few months later, by rising rates of interest domestically and in the international capital markets, and, finally, by a downward development of economic activities in the highly developed countries. Fortunately, some recovery could be noted in the latter part of 1967, when developed countries started to resume their previous rate of growth.

Statement by the Governor of the Bank for Indonesia—Ali Wardhana

The excellent Annual Reports of both the Bank and the Fund, further commented upon by you, Mr. Chairman, in your illuminating opening address, and by the President of the Bank and the Managing Director of the Fund in their informative statements, are like mirrors in which the events of last year are clearly and vividly reflected. The year under review was a dramatic year, highlighted by the devaluation of the pound on November 18, 1967, by the introduction of a two-price system for gold a few months later, by rising rates of interest domestically and in the international capital markets, and, finally, by a downward development of economic activities in the highly developed countries. Fortunately, some recovery could be noted in the latter part of 1967, when developed countries started to resume their previous rate of growth.

We in the developing countries knew how much our economy would suffer, and did suffer, from the events in the developed countries. The backlash was felt in a decrease of demand from industrialized countries, which, according to the Fund’s Report, are taking about 70 per cent of our exports. Eventually, again according to the Fund, the total output of primary producing countries expanded approximately 4 to 4½ per cent, which, with the population increase, left only a meager margin for the per capita growth.

While witnessing the many events taking place in the centers of monetary and economic activity, many of us were desirous of a somewhat more active participation in the efforts made on the solution of the problems. We are, after all, not spectators only, but participants as well, and in our way our stake in the well-being of the world is as great as that of the others. Some of the measures taken by the industrialized countries had an adverse effect on us, although, of course, the improvement sought by them ran parallel with the interests of the developing countries. A more active involvement in the relevant discussions would have given us comfort and perhaps a greater preparedness. This is, of course, not a claim but a wish!

That wish also applied to the discussions regarding the creation of special drawing rights (SDR’s), although we fully realize how relatively small our share is in the total balance of payments of the world. Liquidity problems to us are a matter of daily concern. In this respect, there are some basic differences between the developed countries and us. Theirs is mainly a matter of financing international trade as the latter grows with the growth of their economy. Lately, the situation worsened because reserve currencies, used side by side with gold, became more and more eroded, so that confidence decreased, creating a crisis that called for stern domestic measures to rectify internal and external instability. Ours is a continuing problem of financing our current imports first of all. Sometimes, as in my country, we are even short of liquidity for such needs. But, apart from normal balance of payments financing, always subject to the instability of export markets, of worsening terms of trade, of inflation, of the business cycle, our imports have another dimension. Liquidity for us is not a matter of trade or the normal growth of trade only: it is undergoing the pressures of our tremendous development needs.

We have recently been presented with a draft pertaining to changes in the Fund’s Articles of Agreement, which would allow the Fund to create, within the Fund, at an appropriate time, the envisaged additional liquidity in the form of special drawing rights. My country has voted for it as also for the Resolution presented in Rio de Janeiro. However, in doing so we would like to serve notice that we consider the present solution as still open for further improvement at some future date. We are, for instance, somewhat concerned about the limitation, embodied in the amendments, of the Fund’s authority to establish new facilities for the unconditional use of the Fund’s resources. Would this not partly nullify the benefit to be derived from special drawing rights, if and when implemented? Compensatory financing, for one, might perhaps have to be made more unconditional in the light of the excellent studies undertaken by the Bank and Fund on the problem of the instability of export markets, studies which not only my Government but, I believe, also many governments in Southeast Asia would like to support strongly. Also, it seems not entirely adequate to put developed and developing countries in the same position as far as their share is concerned in the special drawing rights. For one thing, in any liquidity crisis, developed countries could practically always fall back on additional sources of financing besides the facilities of the Fund. It seems to us that some form of weighted quotas would have been more adequate in the case of developing countries. However, I am hopeful that the Fund would show, as usual, its open-mindedness regarding important matters affecting its members.

The special drawing rights, although not conceived for development financing, would, of course, ultimately affect and alleviate the burden of such financing. But they are not available yet and meanwhile developing countries have to continue with their process of growth, for which a large supply of capital is needed. In 1960 the United Nations made a moving appeal to developed countries to devote 1 per cent of their national income to the economic development of the retarded regions of the world. Raúl Prebisch of UNCTAD estimated that the larger developed countries, so far, contributed only 0.6 per cent of their national income.2 However, it would be incorrect and unfair to consider the shortage of capital the sole factor in the sluggish growth of the developing countries. With a more efficient administration, greater discipline, sharper awareness regarding the dangers of inflation, more adequate priorities and project preparation, a more effective coordination and better use of aid, we could and should have performed better, even on the basis of the available means. But it remains a fact that the supply of capital is an important factor in the pursuit of economic growth. … In this connection, although we will go along with the majority, we wonder if an alternative use of the Fund’s net income, other than the proposed distribution among eligible members, would not have been more in line with the needs of our time. …

With the improvement of the balance of payments position of many countries and the reversal of the downward trend of the business cycle since the latter part of 1967, public capital might become more available than last year. But still, so much more is needed and in fact available. I am alluding to another source of capital, namely, private capital. The share of private capital in the flow of total capital flowing into developing countries is relatively small. At the beginning of the United Nations Decade, the United Nations estimated that only one fifth of such capital emanated from private sources.3 The present situation is not much different. This in spite of the fact that many developing countries have overcome their hesitancy to let private foreign capital play a role in economic development. The reasons are obvious: the home market in developed countries still requires capital in view of the growth of their economies, and, if some investors feel that the domestic market has become somewhat restrictive or uncomfortable or less profitable, markets in other developed countries are considered the best alternative field for investment activities.

On the other hand, private capital could play such an important role in the development of developing countries. Mindful of this, the governments of some developed countries have provided investment guarantees to private investors wanting to operate in developing countries….

I have come to the end of my remarks. I would like to congratulate the Bank and the Fund on their fortitude in the midst of last year’s vicissitudes. My country is indebted to the Fund for its invaluable assistance, both technical and financial, given with regard to our efforts to rid our economy of the burden of inflation inherited from the past. The Bank has now joined the Fund in this endeavor and in particular in our endeavor to further develop our economy. We are hopeful that their joint efforts, together with our own, will eventually produce the stability and growth which have been set as my country’s top priority. …

Finally, it is our pleasure to thank most warmly our host, the Government of the United States, for the excellent arrangements and splendid hospitality extended to and enjoyed by all of us.

Statement by the Governor of the Fund and Bank for Korea—Jong Ryul Whang

I am indeed very happy to address this Twenty-Third Annual Meeting of the Fund and the Bank Group, and to commend on behalf of the Korean Government the very meritorious achievements of these two institutions in further promoting international economic progress during the past year.

At the outset, I would like to join with my fellow Governors in welcoming Botswana, Lesotho, and Mauritius to the membership of the Fund and the World Bank Group, and Malta to the membership of the Fund.…

Also, I am very happy to take this opportunity for expressing our sincere gratitude to Mr. Pierre-Paul Schweitzer for his excellent stewardship of the Fund during the past five years. We are most pleased over his reappointment for another term as the Managing Director of the Fund and are now confidently looking forward to another five years of very fruitful Fund activity under his imaginative leadership.

As we are all well aware, the past year has indeed been one of the most important landmarks in the history of the Bretton Woods institutions. For the Fund, it was a year of hectic preparation for venturing toward a bold new horizon, in preparing the way for strengthening the international monetary system by amending its Articles of Agreement in order to establish a special drawing rights facility, thus supplementing the existing resources of the Fund. The successful achievement of this task may well be described as an epoch-making event.

The Group of Ten deserves the very special thanks of all the other members of the Fund for their willingness to establish this facility in the Fund to help alleviate the world’s chronic liquidity shortage and to avoid the recurrence of the serious gold crises and threats to major world currencies such as those witnessed in the past year. I would also like to extend my Government’s sincere appreciation to Mr. Schweitzer and the Fund staff for their great efforts in connection with this scheme. …

With your kind permission, I would now like to cite a few facts highlighting the continuing remarkable growth of the Korean economy in the past year under the auspices of our Second Five-Year Development Program. Testifying to this, for the sixth consecutive year, Korea’s gross national product registered a very creditable growth rate in 1967, which at 8.9 per cent compared very favorably with the population growth rate of 2.4 per cent.

A remarkable feature of this expansion was that it occurred despite a considerable setback in agricultural output because of drought conditions. The growth reflected primarily massive further expansion in manufacturing output, exports and imports—the expansion in exports, at 35 per cent, was particularly marked. Our trade and the restrictive systems were also greatly liberalized. Also noteworthy is the fact that this rapid growth was achieved in the context of increasing stability, with the wholesale prices during the year rising by less than 7 per cent, or appreciably less than the average annual rate of increase over the several preceding years.

In a very large measure, this was the result of our further conscientious efforts at tightening the fiscal and monetary discipline, in connection with which I am very happy to say we have had very close collaboration with the Fund.

The current year, we confidently expect, will be another boom year. We are very hopeful that, despite the unfortunate recurrence of drought and flood conditions, the output growth during the year will not turn out to be far off from our original anticipation of 12.4 per cent.

This growth, too, will be achieved, we are pretty certain, in a climate of increasing stability, reflecting our resolute determination to pursue a course of sound fiscal and monetary management as evidenced, inter alia, by the inauguration this year of new tax and customs reforms.

While, in the coming years, we are sincerely hopeful of improving further on our already creditable performance, we are deeply mindful of the immense problems still facing us. We are firmly resolved, therefore, to work hard, work diligently, and work according to well-coordinated plans to realize our objective of rapid growth with stability.

But we realize that our efforts in this connection must necessarily be supplemented by a continuing flow of adequate technical and financial aid from friendly countries and international institutions like the Fund and the Bank Group. It is in this context that I would like to offer a few comments that, while not in any sense original, are nonetheless important and bear repeating.

The Fund has given us invaluable technical assistance and established for us a credit line on its resources under four consecutive stand-by arrangements.

We earnestly hope that both these forms of assistance will continue. But talking in more general terms, the Government of Korea earnestly hopes that in the implementation of the special drawing rights scheme, as also in the use of its resources outside of this scheme, the Fund will give very sympathetic consideration to the urgent and continuing short-term balance of payments financing needs of the developing countries, especially countries with small quotas like ours.

In our considered opinion, perhaps it is time that the very competent staff of the Fund undertakes a thorough examination of this matter and comes up with a suitable scheme to supplement the useful but still inadequate scheme for compensatory financing of export fluctuations initiated several years ago. In the meantime, the Fund should also undertake a sympathetic review of the terms and conditions governing the use of its resources by the developing countries. …

In conclusion, I would like to pay very well-deserved thanks to our American hosts for their great hospitality and for making such excellent arrangements for this Conference, and to extend to the staffs of the Fund and the Bank our sincere appreciation of their usual superb efficiency for ensuring the success of our deliberations.

Statement by the Alternate Governor of the Fund for Malaysia—Ismail bin Mohamed Ali

… I would also like to take this opportunity to offer our warmest congratulations to Mr. Schweitzer for his well-deserved reappointmerit for a second term as Managing Director of the International Monetary Fund. During his term of office, the world monetary system has gone through quite exciting times. Structural changes are being made to the existing international monetary system and certain modifications to the rules and practices of the Fund are now under way. The fact that these measures have so far progressed smoothly and won acceptance must largely be attributed to the tact and statesmanship of Mr. Schweitzer himself. We are glad that he will continue to be with the Fund to give it his wise guidance and leadership as we move into a more difficult phase of the Fund’s existence, namely, the implementation of the special drawing rights facility.

Since we last met in Rio de Janeiro, many things have happened and most of them are on the debit side of the ledger. The pound sterling has been devalued and a series of monetary crises has led to the two-tier gold price system. Those countries in the sterling area which held large sterling balances in Britain have suffered grievously as a result of the devaluation of sterling. It will perhaps be generally acknowledged that two prices for gold are not exactly a desirable solution to the problem of international monetary stability. There is no point in blaming speculators and others for switching from paper currencies to gold. We must ask ourselves whether they are justified in their fears.

Since the end of the Second World War, paper currencies have steadily lost their value in terms of purchasing power. Some currencies have lost less and some have lost more, but there is no question at all that all have seen a steady erosion of their value. In other words, inflation has been rampant. What is more disturbing is that one cannot discern anywhere on the horizon any sign that this inflationary trend could be reversed. Most are resigned to the prospect that we would be lucky if the situation does not deteriorate further.

Of equal, if not greater, significance, the reserve currency countries have been having chronic deficits in their balance of payments. These deficits have therefore a most disturbing effect on confidence in paper currencies as reserve assets. Restoration of equilibrium in the balance of payments of the reserve currency countries is thus of necessity a basic condition for the return of full confidence in the reserve currency system.

With the attainment of equilibrium in the external position of the reserve currency countries, and coupled with the uncertainty of further addition of gold to world reserves, the contingency plan for the deliberate creation of additional reserves in the form of special drawing rights will have to assume the role it has been designed to play, namely, to ensure that growth in world trade and payments will not be adversely affected through inadequate reserves. While we in the developing countries have not been fully satisfied with this new facility in its present form, we have nevertheless regarded the establishment of this new facility as a modest step forward in the evolution of the world monetary system. We shall watch how this new reserve asset will prove its worth. It is needless to say that the success of this new asset in the world monetary system must affect the welfare of all alike, though in different degree.

Earlier this year, amid the pressures on the world monetary system, the less developed world and the industrial countries met in New Delhi for the second United Nations Conference on Trade and Development. As we see it, the basic objective of this vast forum is to formulate and authorize a program of concrete measures to step up the rate of growth of the less developed countries. It has provided a forum for a more lucid and emphatic presentation of the problems and needs of the less developed world. Results have been achieved in some fields, though in others these have been limited or incomplete. Nevertheless, I cannot help but share with my colleagues in the less developed world the general feeling of disappointment and impatience at the decisions that emerged on the major issues. …

Let me turn now to the study undertaken by the Fund and the World Bank on the problems of stabilization of prices of primary commodities as requested by the Boards of Governors last year under the Rio Resolutions. We have seen the preliminary drafts of this study. The staff of both the Fund and the Bank should be congratulated for their incisive analysis and understanding of the problems of primary commodities as presented in the first part of their study. While this part of the study is no doubt an important contribution to our approach to the problems of primary commodities, let me say that what we are after is not a continuation of the study of the commodities problems which has already gone on for so long but yet has achieved so little progress. When we approved the Rio Resolutions, we were looking forward to the emergence of a new initiative and concerted action on these problems.

The broad proposals put forward by the Fund and the Bank staff are possible solutions to the problems of primary commodities. They are modest proposals which could serve as starting points for closer examination and action in these fields. Though some of these would be new operations insofar as the Fund and the Bank are concerned, such as the financing of buffer stocks, it is interesting to note that they have been carefully formulated within the framework of the Articles of Agreement of both these institutions.

A comprehensive consideration of the problems of primary producing countries will certainly need a bolder approach than these proposals, and possible solutions may have to go beyond the confines set by the Articles of Agreement of the Fund and the Bank. Indeed, as we see it, the Rio Resolutions do not seem to limit the staff study of the Fund and the Bank to possible schemes and arrangements that might be undertaken within the framework of the Articles of Agreement of these institutions, although the proposals must in the main be on what the Fund and the Bank could do under their present charters. In our view, it would be useful for the staff of both these institutions to extend the exercise beyond these confines so that we would also have the advantage of considering a wider range of the possible solutions that could be brought to bear on the commodities problems.

I must say that we are quite dismayed to learn that in the preliminary discussions among the Executive Directors on the modest proposals put up by the staff, some developed countries have found it already difficult to consider these proposals as a basis for further work. We sincerely hope that a more constructive approach will be taken in future discussions on the staff proposals in the Executive Boards so that the Rio Resolutions will not become another futile exercise.

The events of the last 12 months have underlined the need for something more than conventional remedies. We need to change our attitudes; we need to adjust our thinking to rapidly changing times; we need imagination and vision. Basic problems need basic solutions, not palliatives. Thanks to the giant strides of science and technology in recent years, it is possible to usher in an age of plenty, at least for those who are prepared to work for it. But this era cannot be reached unless there is the will on the part of those who have the power and the means to devise solutions which deal with these problems at their roots. The nations represented at this Conference command between them vast and almost unlimited resources. If the will is there, no obstacle should be insuperable. As you know, Mr. Chairman, Malaysia is the world’s biggest exporter of rubber, tin, and palm oil. Last year, we exported over a million tons of rubber, our chief export product, 3 per cent higher than in 1966. But our export earnings from rubber fell by as much as 13½ per cent. In the case of tin, we exported about 74,000 tons last year, and we are now faced with the need to control tin exports because of the fall in price. This is the measure of our problem, a problem faced by many other developing countries. As far as we in the developing world are concerned, all we are asking for is that our toil and efforts of yesterday, today, and tomorrow should not be in vain.

Statement by the Governor of the Fund and Bank for Canada—Edgar J. Benson

This is an age of abundance, Mr. Chairman. The world’s production of goods and services has at least doubled in the past two decades. But unrest and dissatisfaction remain. New aspirations have come to the forefront while old tasks are far from complete. The awareness of poverty has become more, not less, acute.

This is true of Canada as well as of other countries. We are making a determined effort to deal with regional disparities of income within the country and to improve the opportunities of all of our citizens. We are trying to formulate and pursue a set of economic policies which will free resources for high-priority domestic purposes and for a steadily increasing flow of external aid. We are closely examining our taxation system and the priorities of government expenditure.

Knowing how great an effort we who are richly endowed must make, we are deeply impressed with the magnitude of the task facing the developing countries where poverty is so much more acute and widespread and resources so much scarcer. The development of these countries requires exceptional effort, sacrifice, and saving by all strata of their societies. They have not always shown the required degree of commitment to this discipline. It also requires assistance in various forms from more fortunate countries. This assistance has not been forthcoming on the scale required. …

As I turn to the Annual Report of the World Bank and the events of the past year, I become aware of the delays and frustrations on the development aid front. These are well known and only too real and disheartening. Although aid disbursements increased in 1967, we now fear that total aid levels will slip even further behind the objective of 1 per cent of national income. …

I am impressed with the significance of recent developments in the international capital markets. It used to be that virtually the only sources of international long-term capital were the United States and the United Kingdom, which possessed highly developed institutional structures in this field. Since they have experienced balance of payments deficits, difficulties have arisen for borrowers whether these were international institutions, such as the World Bank, national or local governments, or private institutions. Since no adequate alternatives were open, the international allocation of resources suffered and the balance of payments adjustment process became more difficult. Now we are seeing an impressive diversification of the sources of long-term capital. As Canada knows at first hand, European surplus countries are emerging as capital exporters on a substantial scale. This has come about as a result of enlightened financial policies and of improvements in the institutional structure of financial markets, both within individual countries and on a wider geographical basis. It is surely to be hoped that this diversification in the international capital markets will gain further momentum and not prove to be only a passing phenomenon.

I am sure that it will be understood that I am talking about the flow of capital through international markets on normal market terms. We would hope that the flows of aid from donor countries could be planned on a continuing basis rather than as a residual item fluctuating in response to balance of payments considerations. I agree with Mr. Schweitzer that “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.” …

At last year’s Annual Meeting, we supported the Resolution which called upon the staffs of the Bank and the Fund to study the stabilization of primary commodity prices at remunerative levels. This year we can thank them for the first part of their study which has been made available to us, and support the resolution calling for the completion of the study by the time of our next Annual Meeting. Part I provides a useful analysis of the problem, particularly as it distinguishes between its longer term and shorter term aspects. The prices of many primary commodities do move up and down in the short run, sometimes violently, and those fluctuations have a disruptive effect on the economies of the producing countries. They give rise to a need for short-term external financing, which the Fund helps to fill by its compensatory financing facility as well as by its normal lending arrangements.

The basic economic problems of the developing countries, however, are structural in character. We ask ourselves whether it would not be of particular benefit to the process of development if the often unfavorable trend of commodity prices and incomes could be improved. We need to consider how the competitive position and market access of primary commodities can be improved and how the economies of primary producing countries can be diversified.

The Annual Report of the Fund begins by observing that “the performance of the world economy during 1967 was characterized by a mixture of marked progress and serious difficulty.” For the Fund itself, the past year has brought a combination of old tasks and new challenges. The riding out of last winter’s financial storms owes much to the progress of international cooperation in the financial field and the strength of the Fund as a forum for such cooperation and as a source of international credit.

Last winter’s financial storms crossed our shores, and the Canadian dollar came under severe downward pressure in the first three months of this year. Although the balance of Canadian trade was stronger than usual during this period, there were elements in the situation which gave rise to uncertainties about the future development of Canada’s payments position. This situation, in conjunction with a tense international atmosphere, gave rise to a large short-term outflow of capital. During the crisis, Canada received substantial financial help from the International Monetary Fund, from the Bank for International Settlements, and from several countries, for which we were most grateful. As a result of favorable developments in both the external financial environment and in our internal financial policies, the Canadian payments crisis was of short duration. Confidence in the Canadian dollar has now been completely restored. Canada has terminated the special credit lines arranged during the crisis, it has repaid its use of the reciprocal credit facility with the Federal Reserve System, it has met in full its repurchase obligation to the Fund, and has rebuilt its international reserves.

We believe that confidence in the world’s international monetary arrangements received indispensable support from the completion of the work on special drawing rights. Those present here surely have a right to congratulate themselves on their foresight in starting this work early enough and pressing it forward to a successful outcome. The Executive Directors and the staff also warrant our appreciation for their achievements since Rio de Janeiro in translating the agreed Outline into precise proposals for amendment of the Articles of Agreement. We now look forward to the entry into force of these amendments and the activation of the Special Drawing Account, the need for which emerges in clearer and clearer focus as the time for this decision draws closer. It is the intention of the Canadian Government to seek parliamentary authority for the acceptance of the amendments at the earliest possible date.

I turn now to the changes which have taken place in gold marketing arrangements. Canada was not a participant in the gold pool or the Washington meetings of March 16 and 17 of this year, but has associated itself with the arrangements agreed upon at those meetings. New procedures are in effect whereby newly mined gold in Canada is channeled into the private markets. The two-tier gold system appears to have worked out rather well, and to have introduced a greater degree of realism in attitudes toward gold. But some uncertainties in the operations of these new arrangements persist, and it is desirable that these should be cleared up. I am sure that the establishment of the special drawing rights scheme will facilitate the evolution of the role of gold in the international monetary system.

We have before us for the first time this year a proposal that the Fund should distribute some part of its net income in the form of a dividend on net creditor positions. This proposal merits support on several grounds. It is fully justified by the level of the Fund’s net income and accumulated reserves, which in turn remind us of the growth in the Fund’s business in recent years. Moreover, it improves the status of creditor positions in the Fund as reserve assets and provides a recompense to creditors for the interest-earning assets or gold which they forgo. From this point of view, the dividend payment can be seen as a forerunner of the payment of remuneration provided for in the proposed amendments to the Articles. It may be expected that the readiness of countries to have their currencies used in Fund drawings will be further increased.

This will result in an improvement of the Fund’s liquidity which is a most desirable objective in the light of the growing tendency of members to use the Fund’s resources when they need to do so. Mr. Schweitzer has made further proposals to the same end, and these deserve our careful consideration.

I find it most fortunate that the Fund and the Bank meet together on these annual occasions. Their fields of concern are deeply interwoven, as we have seen in such diverse matters as the international flow of capital and the problems of primary commodities. Their cooperation should become ever closer and more productive, led by the collaboration between the distinguished heads of the two institutions. Both institutions have done much to advance the progress of international cooperation in the economic and financial fields, which has served us all so well.

Statement by the Governor of the Fund and Bank for India—Morarji R. Desai

May I first of all congratulate you, Mr. Chairman, on the very thoughtful address with which you have summoned us to our task at this meeting of the Fund and the Bank. My delegation is particularly happy that the honor of guiding our deliberations this year should go to a distinguished representative of a neighboring country with which our ties have been the friendliest for many centuries.

We are happy also that the stewardship of the Fund will remain in the trusted hands of Mr. Schweitzer for another term of five years. …

It is an index of our times that there should be so much talk of despair and disappointment at the end of a period which has witnessed a more dramatic improvement in the human condition everywhere than in any other comparable period in history. It is equally a commentary on the current climate of expectations that we should be wondering about the performance and future of foreign aid when a generation which turned the concept of international economic cooperation into reality for the first time in human history is yielding place to another which rebels against the very inheritance of affluence. Can we then explain our present predicament by the failure to master the arithmetic of accumulation or the calculus of redistributed welfare? Or is it the failure to comprehend and discipline and organize the surging emotions and aspirations of an awakened people that really makes for the complexity of our task? I for one believe that, as we assess and reassess the tasks before our institutions, we shall have to bear in mind constantly our ultimate point of concern and impact—the hearts and minds of millions of men and women. …

At the UNCTAD Conference and in many other forums, it has been recognized that, if the developing countries which have been left behind in the race are to be enabled to develop their technical competence and economic capability, they should receive a preferential treatment in the matter of trade. …

We in India are making every effort to develop exports of our newer manufactures such as iron and steel and a large variety of capital goods and engineering products to both developed and developing countries. But our efforts in this direction are often inhibited by our inability to grant tied credits comparable to those offered by more advanced countries. Once again, if we are to be assisted in our efforts to be self-reliant, this particular disability must be removed by appropriate international action. And I hope that the Bank and the Fund will study actively and constructively the question of creating some rediscount facility for the export credits granted by developing countries as recommended by the second UNCTAD.

Turning to the International Monetary Fund, it is not enough merely to remain content with the fact that the SDR scheme will soon become an established facility. The events of the last few months have underlined the need for activating the scheme without any delay. It is only thus that we shall be able to give strength to those advanced countries which are currently in balance of payments difficulties to continue with liberal trade and aid policies. It is only thus that we shall be able to give some margin of safety to the developing countries which so badly need some improvement in their reserves for this purpose. Apart from the activation of the SDR scheme, the proper functioning of the international monetary system requires attention to a number of problems such as the working of the adjustment process, the long-term structure of reserves, and the role of reserve currencies, to which Mr. Schweitzer has rightly drawn our attention. In this connection, we in India welcome, along with our Commonwealth partners, the recent Basle agreement and the associated arrangements regarding sterling.

Our experience with the second replenishment of IDA also raises the question whether the present procedures for putting IDA in funds are such as to give us any sense of assurance of continuity in its operations. When the SDR scheme was being discussed, many people felt that there was a logical connection between the creation of international liquidity and the provision of development finance. In order to facilitate an agreement on the creation of international liquidity, which was urgently needed, we did not press our plea in this regard. But I cannot help feeling that our experience with the second replenishment of IDA makes it necessary to consider seriously whether the industrially advanced countries should not use a part of the liquidity created on their behalf for adding to the funds of the institutions responsible for development. A great deal of expert opinion favors such an idea; and I, for one, apprehend that, unless we try to give it some concrete shape at least before the third replenishment of IDA, our present predicament may prove anything but temporary.

On international commodity problems we have yet to find even a satisfactory framework for an answer. If we are to tackle seriously the problems of fluctuations in commodity prices and of secular declines in the prices of primary products, we may have to think in due course of solutions beyond the present framework of our two institutions. But it is not necessary to wait till we have evolved totally satisfactory as well as acceptable solutions to this urgent but complex problem. I hope the studies now under way are directed toward solutions which could be implemented without any undue delay and which can pave the way for further progress in this vital field.

In conclusion, I would like to make it clear that, if I have spoken at length on some matters of concern to us, it is not because we do not appreciate the considerable contribution that is being made even today by the more advanced countries to the development of countries like mine. Contrary to the general impression and the evidence of statistics, which in the nature of things are imperfect, the record of achievements in many developing countries over the past ten or fifteen years is truly creditable; and foreign aid has played a valuable part in the progress we have made in agriculture and industry, technical education and health, and in building the infrastructure of power, transport, and communications. I, for one, do not feel that we have any right to demand assistance from others or to complain if this assistance is not forthcoming in the amount or in the manner which our needs might justify. But whether international aid continues to be available or not, the aspirations of the people in the poorer two thirds of the world will not remain unsatisfied for long. If I may quote the words of the Secretary-General of the United Nations at the UNCTAD Conference in New Delhi early this year: “the real question is not whether development will occur but how it will occur and within what international framework. Do we envisage a framework of international cooperation or a framework in which the developing countries are forced back largely upon their own resources and are compelled to take the political and economic steps required for an autarkic pattern of development? … That is the question to which the whole world expects an answer.” …

Statement by the Governor of the Fund and Bank for the United States—Henry H. Fowler

We meet once again in the noble cause of international cooperation. Our works—the works of peace—embody the hopes and dreams of all men.

It is my pleasure to welcome my fellow Governors and other guests to Washington once again after our memorable and enjoyable meeting last year in Rio de Janeiro.

I offer congratulations to our two world organizations and the countries they represent in the quality of leadership secured in the year past for the years ahead. In the election of President McNamara of the Bank and the re-election of Managing Director Schweitzer of the Fund, we in the free world are fortunate.

I am happy to welcome the entry into membership of Botswana, Lesotho, Malta, and Mauritius during the past year.


At this meeting we can for the first time speak of the special drawing rights in terms of formal legal amendments approved by the Board of Governors now in the process of acceptance by member governments. The SDR facility makes a timely entrance on the world’s stage. It is increasingly evident that there is a clear need for a supplementary reserve facility of this character. The events of the past year have already shown that monetary authorities can act with greater confidence because of the prospective establishment of this facility.

My Government has been proud to act promptly both to ratify the amendments establishing the special drawing rights facility and deposit its instrument of participation.

I earnestly hope that all of the members of the Fund will approve and join in the new facility. Indeed, the monetary system as a whole would benefit if the requisite number of governments completed the process of ratification and certified participation to the Fund by the end of this calendar year. The Fund could then, early in 1969, consider the activation of the facility to provide supplementary reserves in the years ahead.

For the first time in the world’s history, we shall be looking to the leadership of an international institution to provide conscious direction in recommending the amount of growth in world reserves which the international community needs to facilitate trade and development.

Article XXIV sets forth general guidance to the Fund on discharging its responsibility under the new amendments:

“In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.

“The first decision to allocate special drawing rights shall take into account, as special considerations, a collective judgment that there is a global need to supplement reserves, and the attainment of a better balance of payments equilibrium, as well as the likelihood of a better working of the adjustment process in the future.”

Already the Executive Directors of the Fund have 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.”

The Annual Report of the Fund examines recent developments in world reserves and concludes with these words:

“In sum, reserve developments over the past several years have been dominated by special and erratic influences that, on balance, have led to a substantially slower accumulation of countries’ official reserves than in prior periods. Such developments could not, over the longer run, be expected to provide the basis for a satisfactory performance of the world economy.”

During the years 1966 and 1967, global reserves rose only slightly more than $3 billion. Monetary gold reserves, in fact, declined substantially. The upward secular trend of reserves was maintained only by an increase of over $5 billion in foreign exchange and in claims on the Fund. With both the United States and the United Kingdom having taken vigorous measures to reduce their deficits, reliance on accumulation of these currencies for increases in world reserves would be unwise. The major industrial countries, excluding the United States and United Kingdom, in fact have added only about $500 million to reserves during the 12-month period from July 1, 1967 to June 30, 1968. This is not enough to assure the continued high growth of world trade, world capital movements, and world income.

It is fortunate, therefore, that we can look forward to the special drawing rights to provide the needed secular growth in reserves. I believe that in the months ahead the need to activate this facility—and on a large enough scale—will be a very urgent matter on our agenda.

The principles and considerations bearing upon activation of special drawing rights also suggest an examination of the substantial progress now being reported by the two major reserve currency countries in their efforts to achieve balance of payments equilibrium in their own accounts.

We have reason to be heartened by the signs of progress now emerging in the economy of the United Kingdom. We look forward to continuation of this trend as the realistic program employed by the British Government makes its full mark upon the international transactions of that country.

As far as the United States is concerned, I am pleased to report that our accounts are moving toward equilibrium. Since our meeting in Rio, the devaluation of the pound sterling, the subsequent run on the monetary gold stock, and a deterioration in the U.S. balance of payments caused the United States to reassess its contribution to the balance of payments adjustment process.

President Johnson, in a message to the Nation on January 1, launched an action program designed to strengthen both the current and the capital accounts of our balance of payments. With the first six months’ statistics already in hand and with early indications on the third quarter, there is clear evidence that substantial progress is being made toward the President’s target.

The delay in the imposition of the tax bill until the end of June will certainly influence our timetable but not the result. With the passage of the fiscal restraint package in June of this year, the economy was put on a more sustainable path of expansion. The fiscal package will cut some $20 billion from the federal budget deficit in fiscal 1969.

As this strong medicine works and our economy moves into better balance we anticipate an improvement in our trade position. Our private capital account has already shown a remarkable improvement.

Results so far this year from the over-all balance of payments program are gratifying. On a seasonally adjusted liquidity basis, the first quarter deficit of $660 million was down substantially from the fourth quarter 1967 deficit of $1,742 million. The second quarter showed a continuing favorable trend, with a deficit of $170 million. One of the most striking developments has been the substantial surplus on official reserve transactions during the first half of this year. Results, so far in the third quarter, are encouraging.

Whatever the outcome of our election, I am confident that the United States has arrived at a fixed and determined policy to bring our balance of payments into equilibrium as a national and international responsibility of the highest priority and to move in a determined way toward restoring price stability in an atmosphere of balanced growth. This is a major source of my confidence in the future of our international accounts.

The decisive vote to increase taxes and to decrease projected public expenditures—both unpopular measures in an election year—should go far to sustain confidence in the dollar, the economy on which it is based, and our system of government.

This vote was a momentous decision—to pay our nation’s bills and order our economic and financial affairs in such a manner as to reduce sharply the twin deficits in our federal budget and in our international balance of payments.

I believe that this action will make possible and probable a return to far better balance in our federal budget, in our international payments, and in our economy during the fiscal year 1969, which began on July 1.

This action by the President and the Congress of the United States to impose fiscal restraint was designed in large part to protect and strengthen the financial system of the free world and discharge the responsibilities of the United States in making the adjustment process work.

I join the Managing Director in his observation that “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.”

Over the longer run, our task will be to extend the record of vigorous economic growth that has been established during the 1960’s. With the economy and the national finances now coming into better balance, our domestic expansion, with its unprecedented duration of 91 months, has been placed on a much more secure basis, with promising effect on our balance of payments.

Apart from the unilateral efforts of the United States and the United Kingdom to strengthen the position of the reserve currencies and provide balance to the economies on which they are based, the functioning of the international monetary system has been strengthened by impressive developments in international financial cooperation.

Notable examples are the enlargement of the swap networks among a number of major financial nations and their proven effectiveness in dealing with several potentially destabilizing short-term capital movements, the arrangements recently announced to strengthen the position of sterling, and the decision of the participants to maintain their commitments under the General Arrangements to Borrow.

An even more significant and far-reaching step was the agreement on measures to arrest the decline of monetary gold reserves and to insulate the international monetary system from the destabilizing influences of the private gold market and speculation in gold. I refer to the agreement on gold policies of the central bank representatives of the active gold pool nations meeting in Washington on March 17 and the subsequent expressions of support from most of the rest of the world. The meeting of the Group of Ten at Stockholm provided additional underpinning to that consensus and to the monetary system as a whole.

I had the occasion, in an address on September 24, 1968, here in Washington, to restate the gold policies of the United States and to set forth in some detail the important relationship we see between these gold policies and the stability of the international monetary system. I refer any interested Governor to the full text of that speech. I will only repeat here a few paragraphs pertaining to the operations of the International Monetary Fund:

“The international monetary system has a vital stake in maintaining the value of gold in existing monetary reserves at $35 an ounce—neither less nor more. This provides assurance both to the countries who hold a large proportion of their reserves in gold and to those who hold a small proportion of their reserves in gold. It is clearly within the capabilities of the system to provide such an assurance, and the United States believes it is important to the stability of the system that this be done. But for gold producing countries that assurance must run only to their monetary reserves and only after they have disposed of their newly mined gold, and any price stability assurance that is provided should not apply to newly mined gold or that held in private hands.

“In giving assurance on existing monetary reserves, we will not accede to any proposal that puts a floor under the private market, thereby assuring the speculators who have built up their hoards of gold that they may unload it at no less than the monetary price.”

I also said in that address and repeat here:

“Given the unique position of gold, as both a commodity and a monetary instrument, special problems could still arise in the two-tier system. It should be posible to devise solutions for such problems—provided such solutions are designed to strengthen and do not threaten to weaken the two-tier system for gold and the monetary system as a whole.”

I would like at this point to venture a few remarks about the future.

The new facility for special drawing rights is a major forward step in the evolutionary process of improving the international monetary system. It has received wide support among economists, academic, business, and financial leaders, and, of course, among monetary officials. In the United States it enjoys broad and enthusiastic bipartisan support in the Congress. This happy situation is the result of the thorough study and painstaking discussions of the problem in international bodies, in legislative committees, in academic circles, and in the financial press during the period in which the special drawing rights plan evolved.

I would hope that further evolutionary changes in the international monetary system would emerge in the same way. The only appropriate way to seek improvement in the system is through the same procedure of careful study, widespread official and public discussions, and carefully considered action.

The further evolution of the system may not involve such fundamental changes as we have seen in 1968, but, while conserving our proven arrangements, we must be prepared to consider change at all times and with an open mind. The reason is very clear. The purpose of the international monetary system is to make it possible for all of us to produce more at home, to trade more with each other, to use capital on the widest and most efficient scale, to visit more with each other, and to help each other, in an atmosphere of financial stability. The stronger the monetary system, the better we can do these things; the weaker the monetary system, the more we will have to restrict ourselves—at home and abroad.

Monetary officials must keep abreast of new ideas and proposals and be willing to examine them in full and free discussion. Such new proposals come from economists, either in the academic or the business world, from the private business community, from legislative committees, and from monetary officials themselves. For example, the Subcommittee on International Exchange and Payments of the Joint Economic Committee of the U.S. Congress recently suggested for study some specific proposals to improve the monetary system.

Academic economists and others without operating responsibilities in the international monetary system can become troubled that many of their proposals do not seem to receive a full hearing from monetary authorities. The authorities, on the other hand, sometimes charge that these proposals from outside sources are not properly grounded in the problems and conditions of the real world. Without careful official examination no one can say at present whether, in the process of official and public discussions and interchange of views, ideas on this important subject will evolve into an area of common ground and constructive action.

The central point is that, if useful proposals do not attract the interest of responsible monetary officials and are not thoroughly assessed for feasibility, desirability, and acceptability, they may fade into the background and be lost. This we cannot afford.

For this reason, I approve most heartily the sentiments expressed by the Managing Director in his opening remarks: “The world does not stand still and the effort to improve the monetary system which serves it is an unremitting task.” I take comfort in his position that, “standing as it does at the heart of the system, the Fund is deeply committed to this task”; that “it will remain alert to those needs and actively explore what contribution it might make to the further strengthening of the world monetary system”; that “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.”

In a few months I shall leave my responsibilities as Secretary of the United States Treasury and United States Governor of the Fund. Therefore, it would not be appropriate for me to launch specific initiatives with which my successor would have to deal without his having participated in the launching. For this reason I do not advance any specific proposal; I take no stand in favor of or against any particular proposal. But, may I suggest that the appropriate institutional mechanisms be mobilized early next year to work on further improvements of the international monetary system in the context of the completion of the ratification of the amendments for special drawing rights.

I repeat my central point: We started with the strong foundation built at Bretton Woods. We built an impressive network of international cooperation on that foundation. We built a major addition to that foundation in the special drawing rights amendment. We must be prepared in the future, as we have in the past, to approach together and to work out together additional ways to strengthen the international monetary system. To do less is to fail in our responsibilities to maintain and advance our public trust.


… As President Johnson, speaking of the Middle East, said on June 19, 1967, “in a climate of peace … we here will do our full share in support of regional cooperation.”

In creating this complex of institutions we have not built haphazardly. Our architecture has been coherent and innovative, complementary, and responsive to needs.

We have also witnessed the response of the developing countries to the need to organize themselves in order to attract and efficiently exploit the external assistance that was available. The extent of these efforts to upgrade the capacity to apply aid effectively has varied from country to country, but several elements have increasingly emerged: the formulation of development objectives and multiyear plans; improvement in the technical capacity to design well and execute efficiently projects that are sound and economically justified; institution of self-help measures that give external donors assurance that domestic economic and human resources are being diligently applied; and creation and maintenance of a climate that attracts foreign private investment, without which an unsustainable burden would fall on official external financing. Although much has already been done by many developing nations to bring about those conditions that will yield a maximum flow of resources for development, we must recognize that more remains to be done.

I turn now to a pressing development problem whose solution will require all our ingenuity and best efforts. This is the financial resources problem; it will dominate the development process in the decade ahead. By and large, we know what must be done, and we have the instrumentalities to do it. But the component that is still lacking is the crucial one—a sustained volume of financial resources at a level high enough to do the job. …

I would like now to mention a few of the ideas bearing on the solution of the problem of assuring an adequate volume of development finance on which I think a broad agreement exists.

1. Strengthening the multilateral approach: It is no longer open to question that a strong multilateral approach holds the greatest promise for marshaling major amounts of funds for development on an equitably shared basis.

The multilateral financial institutions have a well-earned reputation for efficient operations, deriving in large part from the enlightened management they enjoy and the competent staffs they have assembled. They maintain a rigorous objectivity in the financial and technical assistance they render, and they demand of their borrowers economic performance based on dispassionate comparison of efforts and potentialities. For all these reasons, the multilateral institutions inspire confidence on the part of governments and private investors alike that they have the capacity to administer wisely the funds that are entrusted to them.

Because of the confidence they now enjoy, the multilateral institutions are in a unique position to exercise constructive leadership in the critical process of mobilizing development resources that will be adequate in relation to the demands of the developing world.

The stronger their leadership becomes, the stronger their potential for attracting financial resources in world markets. This means leadership in marshaling capital for development finance, guiding the determination of needs and priorities, in selecting the best approaches to the development task, in encouraging both developing nations and capital exporting nations to pursue sound and helpful policies. It also means leadership in developing approaches and techniques to ensure that the balance of payments of donor countries is taken fully into account in arranging the flows of development funds.

This kind of objective leadership cannot and should not be undertaken by any single nation, either donor or recipient. Only by making full use of the leadership potential of the international financial institutions can we mount the most effective attack on the problems of development finance.

2. Broadening the sources of multilateral development financing: A truly multilateral approach to development financing requires a broad multilateralism in the source of borrowed funds as well as in the capital structures of the institutions. Excessive dependence on a single capital market is not sustainable over the long term, nor is it desirable from the standpoint of the institutions themselves, which need the flexibility that can only come from widely diversified sources of borrowed funds. International institutions can and should play an important part both in developing capital markets and in finding other ways of drawing resources from balance of payments surplus countries. Their objective must be the continued strengthening and expanding of the resource base of development finance.

3. Improving the mobilization of domestic resources by developing countries: A third factor on which the solution of the resources problem of the seventies will depend is the efficiency with which governments of the developing countries mobilize their own resources. This involves a tax system and a tax administration that is oriented to balanced economic growth and a set of domestic policies that is conducive to private savings and investment and the avoidance of the disruptions and distortions that characterize unchecked inflation. I would list among the irreducible minimum of sound financial policies necessary for growth a public expenditure program that is formulated with clear priorities in mind, incentives to balanced growth, stable prices, appropriate wage policies, and maintenance of realistic exchange rates. These policies and economic conditions are part of the essence of the self-help concept.

Certainly of great importance in this connection is the establishment of an effective and efficient tax system. The developing nations themselves do—and must continue to—provide the bulk of the resources needed for their development. This is not only because unlimited external resources are not available but also because too much reliance on external resources would bring an intolerable debt burden. Revenues raised domestically, therefore, are inevitably a first resource for development and the pace of development will in consequence depend in large part on the revenues yielded by the tax system.

Substantial international efforts such as the Inter-American Conference of Tax Administrators have already been devoted to encouraging ways to make tax systems more efficient and thereby make revenues available as a source of development finance. But more can be done. For example, tax administrators and tax policy officials in a particular geographic region can establish forums for regular exchange of ideas and experience. The IMF, the World Bank, and the regional banks can add a new dimension to their activities by more active leadership in fiscal operations. They can synthesize existing bodies of experience and analysis and disseminate the product widely in forms most useful and practical for developing countries.

Beyond these steps, the multilateral development finance institutions can, in their own lending operations, give greater recognition to those countries making the greatest relative efforts to mobilize their domestic resources.

4. Compatibility of multilateral development finance with the adjustment process: I have always regarded it as axiomatic that the development finance mechanism should function in a way that reinforces the workings of a sound international monetary system. This means that development finance must contribute to expanding levels of trade and payments and the smoother flows of international capital. It must also be consistent with what we have come to describe as the balance of payments adjustment process. This matter is closely related to the central problem I am addressing in these remarks: that of assuring a flow of development finance that is both sustained and adequate. We can expect such a flow only if we can arrange that it function to ameliorate rather than exacerbate the imbalance in world payments and that it exercise a stabilizing rather than a destabilizing influence on world payments.

Development finance must therefore take into account balance of payments considerations as these considerations affect the ability of donor countries to provide resources. I have already touched on the role of the multilateral banks in mobilizing resources in the private and public capital markets. I should refer here to the recent IDA replenishment proposal as an excellent example of the way safeguards for deficit donor countries can be integrated into an international understanding without sacrificing any of the fundamental principles that have been the strength of such institutions.

5. Private enterprise and development: I believe it has also become clear even to those who may have had lingering doubts that the adequacy of the flow of resources depends in large measure on the attraction of private investment, domestic and foreign, into development channels.

Official financing, vital as it is and will be, cannot be the major element in the financing of development. Of key importance is the far greater volume of private capital flowing internally and from abroad. In my own view, and I know it is shared here, fostering conditions for the full application of the creative energies of private entrepreneurship is essential for accelerated development. And it is also essential that these conditions be attractive for foreign as well as domestic private investment, for with the former come additional benefits of new productive technology as well as management techniques.

One need look no further than the group of countries that can be considered development “success stories” to confirm that vigorous private enterprise development plays a key role in practically all such countries. Recent UN figures show a close correlation between net private capital inflows and high rates of growth. The lesson should be plain.

Let me add a further thought regarding the character, rather than the volume, of private investment flows in the future. Just as the early postwar years were ones in which new mechanisms evolved to channel the flow of public development finance, so is the present period one in which new mechanisms are evolving in the field of private foreign investment. The multinational operating company, the multinational management service company, and other structures now emergent represent the emerging multilateralism in the private investment sector. It is in the interest of all concerned that we facilitate movement in these new and significant directions.


Last year in Rio, the Governors of the Fund and Bank called on the staffs of the Fund and Bank for studies on the problem of stabilization of prices of primary products. Although it has not been possible for the organizations fully to complete their work on this important and demanding task, I compliment them on what they have been able to do in examining this question. The analytic part of the study which has been transmitted officially to Governors contains a very full discussion of many important aspects of this wide-ranging topic.

There is urgent need for more attention to the root causes of market difficulties and to the possibilities of better coordination of trade, production, and development policies. The case of coffee, where we now have five years of experience, has shown both that there is scope for assisting developing countries through price stabilization arrangements and that where success is obtainable in such a price arrangement it hinges ultimately on bringing supply and demand into balance at an equitable level and encouraging diversification.

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.

There can be no lasting improvement in commodity market conditions without more attention to helping the developing countries make the necessary adjustments in policies and plans. These are areas in which the Fund and Bank, respectively, are already making important contributions. These institutions are well situated to do more, with benefit to our collective interests, if they are permitted and invited to play a more active role in the international consideration of particular commodity problems and in the framing of specific proposals to ameliorate them.

We shall look forward to the further work to come with deep interest and sympathy. I am glad to support the Resolution which the President and Managing Directors have put forward to the Governors on behalf of the Executive Directors.


Fellow Governors, in this last meeting with you as the United States Governor, may I be permitted a personal word.

For nearly four years as Under Secretary of the United States Treasury and the last three and one-half years as Secretary, I have been privileged to work with many of you in a common cause of international financial cooperation for peace, prosperity, and development. I am grateful to you, my colleagues, for the many kindnesses and courtesies bestowed on me in countless meetings here, in your countries, and at our other international gatherings.

We have pursued together the development of ever-firmer policies and programs of international cooperation which logically flow from the earlier foundations which our countries built together in the years following World War II.

The past seven and one-half years have been fruitful in putting international cooperation in the economic and financial area on an ever more intensive, intimate, and productive basis.

Let us look back on a few examples:

The General Arrangements to Borrow and the 1965 expansion of the resources of the Fund which have given it a much more substantial capacity to perform the task originally allotted to it at Bretton Woods.

The creation of huge currency swap networks, now totaling almost $10 billion, which have proven valuable tools in minimizing the destabilizing effects of short-term capital flows.

The quick, quiet, informal, and effective means to assist nations that have found themselves in temporary monetary difficulties—Canada, Italy, the United Kingdom, and, most recently, France.

The expansion of multilateral aid to the developing nations through the enlargement of the resources of the International Development Association, the Inter-American Development Bank, and the creation of regional banks in Asia and Africa.

The reciprocal reduction of tariff barriers in the Kennedy Round.

The development in the Fund and the OECD of machinery for the multilateral surveillance of the adjustment process and the creation of standards and guidance for the industrial countries in the 1966 Report to the OECD on “The Adjustment Process.”

The development of a new facility in the Fund for special drawing rights to provide an orderly expansion of world monetary reserves.

Cooperation on gold policies in the interest of greater stability for the international monetary system.

But looking ahead I am confident that the future holds opportunities for even greater and more significant progress in this area of our common aspirations. For the United States, participation in the creation of these building blocks of international financial cooperation flows logically from the basic policies laid down at the end of World War II and pursued by Presidents Truman, Eisenhower, Kennedy, and Johnson with the bipartisan support of the U.S. Congress.

I venture not only the hope but solid confidence that this pursuit of international economic and financial cooperation will be continued by their successors, because it represents the deepest aspirations of the American people for living with their neighbors on this planet.

I have the same confidence in the future policies of the other member countries of the Bank and the Fund. They are born of the same aspirations.

As President Johnson said yesterday: “Let us not fail to be wise.”

Statement by the Governor of the Bank for Germany—Karl Schiller

This world monetary theater in which we assemble year after year presents two dangers. The first is that each time we come together to perform the same play and that we fail to realize the change and challenge of the scene. The last year showed up a lot of new monetary problems to be solved. But I believe we took a good step forward in bringing our play up to date, that is, we made substantial progress in the reform of the world monetary system.

The second danger in this world monetary theater derives from the fact that we here are all both actors and spectators in the same play. Thus, this world monetary conference can be seen as a special edition of the modern “living theater”: everybody in the audience can join in. However, in the world monetary system such an individual action could be very dangerous for all participants. For instance, nobody should be allowed to stand up merely to catch a better view of the scene than his neighbor. If we did not observe that rule, soon everybody would be standing, and this would be very uncomfortable and very expensive for the world monetary system as a whole. In the language of the famous “theory of games,” this would be a constant sum game with negative outpay.

I should like to thank all the participants in the monetary game for the cooperative way in which the problems were tackled and solved last year—above all the World Bank and the Fund. I hope that Mr. Schweitzer’s new term will take a less dramatic course than the last one….

Coming now to our agenda I wish to begin with one particular item. That is the choice of the place for the Annual Meeting in 1970. As you know, my Government would be delighted if Berlin could become host to this meeting. As former Senator for Economic Affairs of that city I can assure you that Berlin is a modern and lively place with a warm and hospitable atmosphere and a rich cultural life. The city offers excellent conference facilities and very good hotels. Our proposal to hold the meeting in Berlin was presented to the World Bank and the Fund only a short while ago. I would be very grateful if you would come to a decision in favor of Berlin in due time. But I would add that there is no immediate hurry.

With respect to some press utterances this morning, I should like to be allowed to add a word concerning access to Berlin. In 1961, the late President of the United States, John F. Kennedy, declared formally the famous three essentials for Berlin. One of these three essentials was free access to the city. We in Germany have no doubt that this declaration will be valid also in the future.

The focus of all our activities is the development of international monetary policy. The past year has demonstrated the flexibility of our monetary system. The dangers of last year have been overcome without severe damage to world trade and without greater restrictions. Some of the most important sources of possible disturbances have been eliminated or at least contained. From the international point of view, we are living in a period of transition, that is, the time between the decisions taken in Rio de Janeiro and Stockholm and that day in the future when the special drawing rights may be activated.

I regard the SDR’s as an important step toward an improvement of our monetary system. The Federal Republic of Germany fully supports the new arrangements. The German Parliament began immediately to deal with the ratification law. I am sure that it will be passed without delay. When the time comes to activate the new instrument, we shall all have to take great care to apply it wisely. It has to be a rational instrument to supplement our conventional reserve media. The special drawing rights are not designed to produce or to distribute world inflation. They are designed to provide the necessary monetary basis for sustained and stable growth of the world economy as a whole.

In the meantime, in this period of transition, we depend even more on the rational wisdom of national policies in the economic, monetary, and fiscal fields.

In this context I should like to refer to the measures taken by the United States Government to restore internal and external equilibrium. I appreciate the political efforts to reduce the deficit in the U.S. federal budget. I hope the results of these efforts will become apparent in the near future. I appreciate that the U.S. Administration in general has very firmly rejected measures which might favor a revival of protectionist trends in the world. Within the European Economic Community I have advocated the support of the United States in its stabilization program. On this initiative the European partners of the United States have stated their readiness in principle to accelerate on their side the tariff cuts of the Kennedy Round. I know how difficult it is for the U.S. Government to fulfill in time the expectations attached to that proposal. Nevertheless, we should do everything to prevent this project from failing, for it is an excellent example of a progressive solution of balance of payments problems and of international solidarity.

An important step, I feel, has also been made in the question of sterling liabilities. After the arrangements made during the last few weeks in Basle, we can now be confident that possible changes in overseas sterling balances will no longer cause disturbances. Moreover, the Basle agreement means an important modification of the role of sterling as a reserve currency. This modification is in itself a new proof of the flexibility of our monetary system.

It should also be possible for us to find a solution to the question of the sale of gold. Since gold is still a reserve medium we should protect it against speculative influences. But it would not be compatible with the Fund’s objective to buy under all circumstances any amount of gold offered to it. It would seem reasonable to me if the Fund were, in future, prepared to purchase gold, under certain safeguards and limitations, if the gold price falls to or below $35 per ounce. Only purchases of nationally produced new gold should be excepted from this rule.

During these last weeks German economic and monetary policy has again moved into the limelight and has become the subject of some speculations. Let me, therefore, say a few clarifying words on the Federal Republic’s position.

1. Some people look only at the surplus in our trade balance. This isolated view is wrong, for our surplus on trade account has been very largely compensated by capital movements and other net outflows. Consequently our foreign exchange reserves have shown little increase. In other words we have provided other countries with the capital and the liquidity required to finance their import needs.

2. Therefore, the German balance of payments as a whole is not in disequilibrium. During the first half of 1968 our basic balance was, in fact, in slight deficit; the third quarter seems to show the same picture.

3. Last year, the major part of German capital exports was of a short-term nature. This year the long-term capital exports of Germany are predominant. They will reach an amount of DM 8 or 9 billion. As a result of this fundamental shift our balance of payments is now on a more solid basis.

4. We regard this long-term capital export as an important success of our policy. It was also the consequence of reducing German interest rates to a level which is low compared with other countries. Access to the German capital market for foreign borrowers is absolutely free. There is no restriction. The Federal Government has in fact encouraged the German commercial banks to float foreign loans in the Federal Republic. I think this is “good creditor policy.”

5. To be a good creditor—that is also the rule for our policy at home. Our goal was full utilization of domestic capacities and the promotion of imports. Both fiscal and credit policy were directed to this aim. We have achieved this target. Since the recession of 1966-67 the German economy is on the track again with a full head of steam. Therefore, our import performance has improved. Economic growth this year will be more than per cent in real terms. At the same time, we reached in these two years a very high degree of price stability.

6. In respect of this price stability we differ substantially from the development in some other countries. Our attitude on this subject is quite clear: no nation should be urged to accept unemployment as a means of restoring balance of payments equilibrium. But neither should any nation be forced to sacrifice its own price stability merely because other nations are in an inflationary process. Anyway, we are not willing to do so. We have restored stability and growth in our country. Charity begins at home. Now we try to export stability and growth. That seems to me a better solution than being forced to import inflation from other countries.

High economic activity in the industrialized countries is essential for the developing countries. In this context we are fully aware of the problem of the terms of trade for the developing countries.

Thus, we entirely understand the continued efforts to find a scheme for the stabilization of prices of primary products.

However, these questions are difficult and complex. They require a discussion in all respects. I know that for many developing countries the primary exports constitute an essential source of income. In the past, my country has cooperated in all negotiations on commodity problems with much good will and readiness to compromise. We shall continue to do that in the future. Lasting solutions have to keep in line with market forces. The fixing of prices without regard to these forces would only favor the substitution of natural products in the industrialized countries and the build-up of nonmarketable surpluses in the producer countries. International buffer stocks can be justified economically only if they serve to neutralize short-term fluctuations. Anything that goes beyond this would tend to perpetuate traditional structures of production and lead to misallocation of resources, and that means retarding rather than promoting progress. How international market schemes and price regulations can disturb the international economy is demonstrated very clearly by some mistakes made in the agricultural schemes of the European Economic Community. The results are growing overproduction, distortions in the price mechanism, obstacles for structural changes in home production, and damage to the agricultural exports of third countries. We should have this example in mind when new international schemes for primary products are being discussed.

The best aid consists in expanding the demand of the industrialized countries by a permanent policy of stable growth and by liberalization of imports. …

The Federal Republic will go on playing its part in the international concert. In this way we will give continued impulse to world trade and to substantial increases in the supply of world capital.

Growth and stability are our goals. Germany is pursuing these goals by a clear and courageous policy combining the market economy system with a rational fiscal and monetary guidance.

This new economic policy might be uncomfortable for some vested interests—at home and abroad. But we have to fight—and this is a permanent fight—against obsolete attitudes and protectionism, indolence, and nationalism.

And we are quite sure a tacit alliance among the peoples is emerging: an alliance of economic freedom and social welfare, an alliance of stability and growth, and an alliance of progress and prosperity for all people in “One World.”

Statement by the Governor of the Bank for France—Frangois-Xavier Ortoli

This is the first time that I have the privilege of representing my country at this annual assembly of the Fund and the Bank.

I am gratified to find here in Washington my colleagues, the Finance Ministers, the Governors of the central banks, and the leaders of the Bretton Woods institutions, Mr. Schweitzer and Mr. McNamara.

At the Annual Meetings of the Governors of the Fund and the Bank it is traditional to recall the lessons learned individually and collectively in the course of the year; the year just ended has been marked by important events both in the monetary and the development fields.

If we wished to describe briefly the phenomena thus observed, we might say that, in the monetary field, we are witnessing a movement of acceleration and amplification; in the field of development, a process of slowing down and shrinking. This somewhat contrasted picture calls for clarification, in order to provide an objective appraisal of the evolution that has taken place during the year.

International Monetary Developments

The many events that have occurred since the Rio Conference have compelled our governments to give more thorough consideration to the very foundations of the international monetary system. Were it not presumptuous to attempt to simplify so complex a development, we might say that the common experiences undergone have of course tightened international monetary cooperation, but have above all made still more obvious the scope of and the need for the progress still to be accomplished.

Results Achieved

Of course when we speak here of international monetary cooperation, our thoughts turn first to the members of the Fund.

In this regard, the past year has been fruitful, for, as underlined in the Annual Report, the operations of the Fund reached a record figure. In addition, we also noted, from our own experience, that the reversibility of drawings worked flexibly. Similarly, we saw that concrete—sometimes spectacular—results have been achieved in the negotiations conducted within the Bretton Woods organizations, the Bank for International Settlements, and the European Economic Community.

The test of cooperation, however, it seems to me, must be sought not so much in the activities of the international organizations as in the better adjustment of the internal policies of the member countries to the problems arising out of their financial and monetary relations with other countries.

In the final analysis, it is the progress achieved in that direction by the governments that keeps tension within limits compatible with the survival of some degree of international monetary order.

From this point of view, the year 1968 seems to me to be marked, for the various groups of countries, by a better understanding of their responsibilities.

In July, the Congress of the United States approved the courageous measures proposed by the Administration to bring the rate of activity of the economy back within limits compatible with a better balance of external payments. The same preoccupation inspired our British colleague in the choice of a policy that has already resulted in a perceptible improvement in the current payments of the United Kingdom. As a complement, the EEC countries collectively decided, at the end of 1967, to pursue an expansionary policy, and measures have been taken in this respect by the governments concerned.

France also made its contribution to this collective effort. First, during the first half of the year, by an expansionary policy arising out of a “plan de relance” adopted in February; later, following the crisis in the French economy in May and June, by a set of temporary measures aimed at restoring more normal conditions; and last, early in September, by an over-all program of disciplined expansion that will, we anticipate, enable us to restore without delay a durable equilibrium.

Without going into detail, I wish to recall here that France tries to solve its problems in accordance with the principles that it has always upheld, rejecting the devices of protectionism and isolation.

After the limited and temporary restrictions required by an exceptional situation, the French market is again to be fully open to foreign competition; exchange control has already been lifted, only three months after it was set up. We did not contemplate the dubious medicine of deflation, believing that a modern economy, placed in our present situation, finds in expansion the stimulus that enables it to overcome difficulties that would be insurmountable under conditions of stagnation. Lastly, during the period of disturbance that we experienced, as well as in the phase of resumption of growth in which we are now engaged, it seemed reasonable to provide for a certain use of our exchange reserves in combination with temporary and limited recourse to the assistance that we have received within the framework of international monetary cooperation.

Our economic policy has begun to yield results: production is coming up strongly, price increases remain moderate and, in many sectors, are much lower than the forecasts made following the events of May 1968. The purpose of the measures just adopted by the French Government is to stimulate productive investments by incentives and to lighten the burdens borne by enterprises. These measures are to contribute, in a favorable international economic context, toward the maintenance of a continued economic growth that is already spontaneously appearing, and through an improving productivity, which continues to be sought and encouraged, to enable the French economy to remain competitive.

Since French production appears to us to be sound and capable of competing, since there is no fundamental disequilibrium in our monetary parity or in our balance of payments, it seems to us that the path that we have chosen is the one that best reconciles the demands of our own recovery with our concern regarding the necessary redefinition of the international monetary system and the improvement of its operation.

What Remains to Be Achieved

However, we must not give way to complacency, either in our judgment upon our own effort or in our appraisal of the progress still to be accomplished in order to give durable stability to the international monetary order.

In this regard, I think that there are currently three major concerns:

(1) The first is the reform of the Fund, the foundations for which were laid in Rio de Janeiro and the texts of which, drafted by the Fund Board of Directors, were submitted to the Governors at the proper date, i.e., April 1968. Though I regret that a jurisdictional interpretation clause was not inserted—a point that I shall return to and illustrate later on—I think that the proposed reforms respond in part to the concerns expressed by the countries of the Common Market. I believe that they establish a more representative—though still an inadequate—balance between the various groups of the member countries of the Fund.

(2) The second comment concerns the set of proposed amendments to the Articles of the Fund to institute facilities intended to supplement the existing monetary liquidities. On this point I shall confine myself to two remarks: one, to repeat—without stressing it—that the proposals submitted at the Stockholm conference departed, in several important items, from the Outline unanimously approved in Rio, at least as France had understood and interpreted it. The other, less apparent perhaps, is that the evolution of the international monetary situation, should it retain its present trend toward firmer observance of the necessary disciplines, might bring the system of special drawing rights back to a conception closer to that which seemed to prevail in Rio and to which we held in Stockholm.

It is true that the efforts of the reserve currency countries to bring their payments balances back into equilibrium, and a proper use of gold as an effective medium of settlement between central banks, could, if given consistency, restore to the special drawing rights scheme the nature of a contingency plan aimed at providing supplementary liquidities, as and when needed. Things would be different if the disequilibria still prevailing were not durably corrected in the relatively near future.

The French Government has always felt that the plan approved in Rio could be appropriately implemented only after equilibrium has been restored in the balance of payments of reserve currency countries, after a collective judgment has been attained that there is a shortage of international liquidity, and after adequate guarantees have been defined as regards the interpretation of the Fund’s Articles of Agreement. Its position has not changed.

(3) This problem is connected with the third point I wish to mention—the role of gold in the Fund in particular, and, more broadly, in international monetary relations.

This problem has been the subject of intensive exchanges of views within and outside the Fund. It is therefore a familiar one and I need not dwell upon it. It seems advisable, however, to recall that the provisions of the Articles are clear on this point, and I feel that they must be implemented as drafted. This point of view does not arise from national preoccupation or from personal conceptions; it simply stems from the realization that, in the absence of a jurisdictional institution—I would say even because of that absence—the Board of Executive Directors and the Board of Governors must provide fast, objective, and legally sound interpretation of the Articles, without letting considerations of opportunity or convenience interfere in the application of a text that constitutes an international convention. France’s position in this field finds its justification in the role of gold as the basis of the international monetary system. In our opinion, as is well known, no artifice of reasoning or technique can disguise this essential function of gold.

Even when the difficulty of interpretation of the Fund’s Articles, to which I have alluded, has been eliminated, we will not, for all that, have completed our task, but only taken one step toward the stabilization of the international monetary system. It would be hazardous to predict its future. However, I believe it is neither a paradox nor a truism to say that the validity of the reforms accomplished is dependent on the permanence and effectiveness of the efforts that members of the international community will consent to make, to maintain, or, if necessary, re-establish their economic equilibrium, from the triple point of view of expansion, price discipline, and balance of their external payments.

These are the duties of the developed nations to themselves. They have other duties, to developing countries, whose specific problems call for even greater attention and solicitude on our part.

The Problems of Development

The problems of development contrast with the international monetary situation as I have just described it. Here we find no spectacular transformations, but a further widening, this year again, of the gap between the living standards of the industrialized countries and those of the poor countries. And, despite the undeniable fact of a serious shortage in the resources of the underdeveloped countries, reform projects are marking time. They have been slowed down pending the completion of supplementary studies. Such studies are possibly inspired by the highest motives; they ought not, however, put off the time when constructive new answers are to be given to the problems facing those countries. Here we see no concrete progress in international financial cooperation: the level of aid remains stationary and the objectives of assistance defined in relation to the national income of the contributing countries, as accepted by the international community, still remain a dead letter, with a few rare exceptions.

In this situation—further aggravated by the continued world tension and armed conflict—it is easily realized that the hopes fostered by the underdeveloped world on the eve of the New Delhi Conference have been disappointed.

We have not met, though, only to deplore events but also to learn from them. It is mainly up to us to act as needed to expand the financial resources available to the international institutions for which we are responsible and to guide their activities toward solutions that are at one and the same time constructive, bold, and in keeping with their mission.

In this respect, I should like to comment on the following two points: first, with regard to the traditional activities of the International Bank and the Development Association; and secondly, concerning the exemplary role that the Bretton Woods institutions ought to play in the stabilization of prices for primary products in conformity with the mandate unanimously voted at Rio.

The Traditional Activities of IBRD and IDA

… The French representatives have likewise proposed that an appreciable part of the IMF’s net income from its operations should be made available to the International Development Association instead of being placed to reserve or distributed to Fund members.

Stabilization of Prices of Primary Products

However, and this is the last point that I want to make, the expansion of the resources and improvement of the methods of IBRD and IDA in their traditional spheres are only part of the necessary further undertakings. Over and above this, the Bretton Woods institutions, in order completely to fulfill their mission, should finally tackle a problem expressly mentioned in the Final Act of the 1944 Conference by clearly indicating their willingness to make an effective contribution to the endeavor under way for the stabilization of prices for the main primary products.

The importance of the problem is well known: unless there is some concrete action in the matter, the export receipts of developing countries will remain insecure and the terms of trade will continue to deteriorate, thus more than offsetting any results obtained from financial aid. 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, would thus make a vital contribution toward solving one of the fundamental problems of the modern world, that of the structure of the developing countries’ international trade.

Now, experience shows that such arrangements have run up against two types of difficulty, especially in the financial sphere: on the one hand, buffer stocks—which in some cases are required for implementing such agreements—call for the granting of funds, at the beginning of their operations; such grants can only be provided for by appropriate prefinancing schemes; on the other hand, the producing countries, which are led to submit to restraints that in some cases involve limitations on their production, can participate in such mechanisms only if they are enabled to diversify their activities.

The Fund, the Bank, and IDA, each insofar as it is concerned, and within the framework of its own present articles, could contribute to such operations. There is no doubt that—should these institutions clearly manifest their willingness to place part of their resources at the disposal of the commodity arrangements now being negotiated, or to be negotiated in the future—negotiations of such arrangements would be much more likely to be successful.

Bearing this in mind, we adopted last year at Rio a Resolution inviting the Managing Director of the Fund and the President of the Bank to have a joint study made of the problem and of such courses of action as might be appropriate. The Resolution further called for the Executive Directors to transmit to us the studies carried out by the Fund and the Bank so that we could examine them and take such decisions as were thought necessary, if possible on the occasion of the 1968 Annual Meeting.

What has become of this Resolution?

The Bank and Fund staff, for their part, have carried out a number of studies which I should like to commend most particularly for their quality and thoroughness, although they are but a first step and should be followed up by proposals for specific action which these institutions could implement in the required sphere.

But I fear that the procedure proposed to us today is not up to the standard either of the studies already made or of the avenues we opened last year in adopting a Resolution which found a large following among the developing countries.

As a matter of fact, the resolution proposed to us this year refers only to part of the work carried out by the Fund and Bank. It fails to mention the studies submitted to the Board in Part II of the report which, I think, contained the more concrete suggestions and the greater innovations. Furthermore, the aim of this resolution is to delay by another year the submission to governments of conclusions as to the methods whereby these two institutions might, in practice, cooperate in seeking a viable solution to the problem.

Considering that studies already carried out and already informally passed on to member countries have reached an advanced stage; that the undertaking was made at Rio to submit the results, if possible, in September 1968; that the problem is a matter of urgency; and that the swift setting up of the special drawing rights facility in the Fund constitutes a precedent in itself; I submit that nothing warrants a further delay of one year before conclusions are proposed.

If we did not today take note of the studies already undertaken, and if we did not prescribe a nearer deadline for the present procedure, here would be a grave risk of international opinion—particularly in the developing countries—doubting our real willingness to reach a conclusion.

* * *

Having this in mind, and deeply convinced that we will be understood by our colleagues, we deem it necessary that a resolution be adopted calling for concrete solutions to be submitted, at latest, by December 31, 1968.

The trials the world is undergoing, which France has shared, confirm my country’s deep conviction that the fight against underdevelopment, as well as the smooth working of the international monetary system, requires a coordinated effort on a world-wide scale.

But this cooperation can be achieved and be fruitful only if each country, with due regard to its sovereignty and with a high sense of its responsibilities, is prepared to impose upon itself sacrifices and discipline without which the operations undertaken would be without effect.

Statement by the Governor of the Fund and Bank for Zambia—E. H. K. Mudenda

I wish to congratulate you, Mr. Chairman, on your election to such an important office. The International Monetary Fund and the World Bank Group play an important part in furthering the cause of economic welfare and cooperation in the world community. We are happy to be associated with a group of financial institutions which mean so much to so many of our fellowmen.

I wish to congratulate the Bank and the Fund on yet another successful year. I welcome and congratulate our new President. … I wish also to congratulate Mr. Schweitzer on his reappointment as Managing Director. …

May I also extend our warm greetings to the new members, Botswana, Lesotho, Mauritius, and Malta.

Let me now highlight what seem to me to be the important developments in the sphere of the international monetary system. The devaluation of the pound sterling in November last year demonstrated the vulnerability of the reserve currencies and thereby raised doubts about the apparent stability of an international monetary system based upon reserve currencies. This was not the end of the story. More was to come. The gold fever which engulfed the world ultimately culminated in the evolution of the two-tier market in gold. The operational feasibility of the two-tier market and the vexed question of the purchase of newly mined gold are aspects of the situation which even today remain somewhat obscure. Further, the successful completion of the Basle agreement and the emergence of the sterling reserve guarantee scheme have added a new element to the role of sterling as a reserve currency. From available indications, it appears that further changes in the reserve role of sterling cannot be altogether ruled out. If the evolution of these arrangements will be to off-load, at least partially, the United Kingdom’s reserve currency burden, a more direct involvement of the IMF in the process will be necessary. The earlier the air of uncertainty surrounding these issues is cleared, the better it would be for the over-all stability of the international monetary system.

The only silver lining to this cloud of uncertainty is that we now have a contingency plan for supplementary international liquidity. In the light of the recent crises, I hope member countries will take steps to ensure expeditious activation of the special drawing rights. While this is a step in the right direction, it can hardly offer a complete solution to the problems of international liquidity. It would be pertinent to ask whether the dimension of the special drawing rights to be created is adequate to cope with the increasing needs of international liquidity. The point that I am trying to make is that we should be prepared, in the years to come, to enlarge significantly the dimension of the special drawing rights.

In regard to the operational aspect of the IMF, there seems to be a need to explore the possibilities of treating more leniently the repurchase obligation of developing countries in balance of payments difficulties. The process of correction of balance of payments deficits is such that the time lag involved is relatively longer and hence, if the period of repurchase obligations could be stretched in deserving cases, this would go a long way in enlarging the usefulness of IMF borrowings. …

We congratulate the Bank and the Fund on their excellent analytical study on commodities. However, an urgent need remains to evolve constructive policies. We support, therefore, the Resolution before us on this matter. …

Much of our concerted effort to achieve a satisfactory development rate will be frustrated if we do not establish a more durable mechanism for international monetary payments—a mechanism which will satisfy the requirements of confidence, adequacy, and flexibility.

Mr. Chairman, I wish to reaffirm Zambia’s confidence and faith in the Fund and the World Bank Group and to assure you that we shall continue to give full support to measures designed to increase the effectiveness of these important institutions.

Statement by the Governor of the Fund for Italy—Emilio Colombo

The months which have elapsed since our last meeting have indeed witnessed many important events, such as the sterling devaluation, which has been followed by three speculative waves resulting in a gold loss for the international monetary system; the resilience of the United States and the United Kingdom balance of payments deficits; and the French social crisis which has cost France a loss of about one third of its reserves within a few weeks.

The latter event has provided the opportunity to test once more international monetary cooperation which, in the past, had already scored important achievements. I refer to the constructive consultations preceding the sterling devaluation which allowed the orderly unfolding of the operation and avoided competitive devaluations; to the enlargement of the swap network with the United States and the United Kingdom; and finally to the Washington and Stockholm agreements. This cooperation then continued with the granting of a medium-term credit facility for the United Kingdom to finance the process of reserve diversification by countries belonging to the sterling area.

These concrete examples of cooperation, in the absence of which monetary disorder would have prevailed, constitute clear and convincing evidence. They show to all of us here convened, and particularly to the authorities of the major countries, that international monetary cooperation is useful not only to the countries which benefit from it but to all countries irrespective of their credit and debit positions. I feel I can say this because my country, on different occasions, found itself both on the receiving and on the giving end of the pipeline.

One of the most significant examples of monetary cooperation during the year has been the agreement for the creation of special drawing rights. Credit must be given not only to the Executive Directors and the Deputies of the Group of Ten for their expert work and dedication but also to the political vision of the governments here represented and to the mediating efforts of the Managing Director. On the occasion of his new term, I should like to convey to him our best wishes for his success. My country has contributed during the last five years to this agreement in both its study and negotiation stages; it is now about to ratify this agreement with the conviction that it will be recognized in the future as a landmark in the evolution of the international monetary system—the beginning of an era when reserve creation will be more and more the result of collective decisions in which each country will participate in proportion to its economic and commercial importance.

The new facility, being the outcome of a very difficult compromise aimed at reaching a general consensus, is not perfect. The main deficiency, according to some, is the lack of a link between reserve creation and the provision of resources for development needs, a link which, on the contrary, exists in the present system. An improvement which could be carefully studied and eventually made, without modifying the text of the Amendment, could consist of a pledge by the main industrial countries to use the part of their reserves corresponding to a portion of their special drawing rights allocations for the replenishment of IDA or for subscription to World Bank bonds.

The Washington communiqué agreed upon shortly before the accord on the creation of the new reserve asset must be viewed in the framework of the same evolutionary process. Its fundamental idea is that newly mined gold is not essential to the functioning of the international monetary system; the importance of this metal in the monetary system, as well as the use of the reserve currencies, is bound to decrease gradually.

Whatever our opinion might be on the role of gold in ten or twenty years’ time, we cannot overlook the fact that gold today represents more than half the world’s monetary reserves and will still continue for some time to be the most important component of reserves, although there has been a tendency of late to freeze it in the reserves as a result of the increased reluctance of the monetary authorities to use it. Undoubtedly the monetary authorities of both gold-holding and gold-producing countries have a common interest not to let the price of gold drop appreciably below $35 per ounce; the preoccupation that this may happen is not completely unwarranted.

In interpreting the Articles of Agreement this common interest should induce us to reaffirm the obligation of the Fund to purchase monetary gold at the official price from members who wish to obtain the currency of other members. For the same reason a satisfactory agreement should be concluded with South Africa relating to newly mined gold. We cannot but welcome such agreements since they will strengthen the consensus among the more than 80 countries which have adhered to the principles embodied in the Washington communiqué of last March. We would particularly welcome that this consensus be extended to all the members of this assembly.

As far as the SDR agreement is concerned, we shall not venture to forecast when, once it has been ratified, the new facility will be activated. This important decision will depend on the collective judgment that there is a global need for reserves. This judgment cannot but be influenced by factors such as the drop in the world monetary gold, the decrease in the ratio of reserves to the total world imports, and the increased propensity of countries to resort to credit rather than use owned reserves.

The agreement having been reached on the special drawing rights facility, providing a mechanism for the creation of international liquidity when needed, still other problems remain to be solved. Of fundamental importance for the smooth functioning of the international monetary system is the adjustment process; that is the problem of improving the mechanism for the prevention and elimination of the disequilibria in such a way that the inevitable burden of adjustment can be kept within reasonable limits acceptable to free countries.

There has been much debate during the last few years as to who should bear the main responsibility for the adjustment, whether the deficit or the surplus countries. The tendency seems to have emerged that in solving the controversy the prevailing conditions in the world economy, deflationary or inflationary, should be taken into account whatever the reasons or the countries which caused the imbalance. The fact remains that the surplus countries of continental Europe have decisively undertaken a policy of balanced expansion aimed at reducing their current account surplus. In addition, they have accepted compensating outflows of capital to a degree which, under different circumstances, would be excessive. At the same time, a reserve management policy has been pursued to avoid disturbing international monetary equilibrium. We should welcome the fact that the United States authorities have adopted fiscal measures, aimed at curbing internal demand, which should have desirable consequences in the domestic economy as well as in the balance of payments. The United Kingdom authorities, too, both at the time of and after the pound devaluation, embarked on a program aiming at the dampening of consumption and at slowing down the growth of income; these measures should eventually lead to a balance of payments surplus. Still with regard to the adjustment process, we acknowledge the timely action of the French- Government to counteract the effects that the serious crisis, which swept the country with unexpected violence, had on the domestic cost structure, on prices, and on the balance of payments. The stabilization program seems to be oriented toward expansion. At any rate, the French Government has abolished the exchange controls which it had introduced in the wake of the crisis. It has pledged to remove quantitative import restrictions according to schedule, allaying, we hope, the fears of the protectionist tendencies which those restrictions had encouraged elsewhere.

In spite of these developments, the main deficiency of the adjustment process seems to lie in a number of time lags, namely, the length of time needed to decide on corrective measures and the delay with which these are carried out. Usually several months elapse between the diagnosis and the beginning of the treatment. As far as the effects of the adjustment policies are concerned, we must unfortunately recognize that, at least up to now, the efforts made by the two groups of countries have yielded rather modest results. Our mixed feelings of impatience and disappointment find comfort in the recognition that it is not in the common interest for the adjustment process to take place in too short a period of time, since this would have negative effects on international prosperity.

Finally, it is possible that the efforts of the deficit countries to reach external equilibrium and eventually a surplus, sufficient to pay off the debts previously incurred, will not find adequate response by the surplus countries, since they might not be willing to accept a corresponding deterioration in their balance of payments, which for some of them could even entail a loss in their reserves. This seeming conflict of objectives could be attributed to the disequilibrium which has lasted too long and to which the national economies have already become accustomed. Under these circumstances, the creation of new reserves in the form of special drawing rights would also contribute to restoring the equilibrium in the United States and United Kingdom balance of payments. It is true, however, that the amended Article XXIV, Section 1(b), of the Fund Articles of Agreement, evidently referring to the major countries, considers the attainment of a better balance of payments equilibrium as a special consideration bearing on the activation of special drawing rights. As many economists contend, it is likely that in order to reconcile these objectives the two processes should take place simultaneously.

I must apologize now if I return once more—as I did at previous Annual Meetings—to another problem for which up to now only a partial solution has been found: the stability of the system or, as it is also called, “the confidence problem.” The dollar and the pound sterling, irrespective of what their future role may be as reserve currencies, will remain the most important trading currencies. They will continue to be used for the settlement of commercial and financial transactions; thus, they will still be widely held by economic operators and commercial banks, as is proven by the continuous expansion of Euro-markets. Even if the United States and the United Kingdom were in balance of payments equilibrium, one cannot rule out the possibility that confidence movements may induce private holders to convert dollars or sterling into gold, to shift funds from one country to another, as well as cause flows of funds from private to official holders. One should then add that the central banks’ propensity to hold gold rather than fiduciary instruments might increase in the future. As a result, the pressure on the gold reserves of the issuing countries and on the whole system may increase. A degree of instability is therefore built into the system, not so much because certain important currencies perform the function of reserve assets but because they are used as international means of exchange and settlement. In other words, there would continue to exist an overhang of dollars and pounds at least as long as these currencies continue to be widely used in international transactions. The system which works also because of this liquidity has at its disposal mechanisms which allow flows from one sector to the other when at a certain moment the private operators or the central banks consider this liquidity to be in excess of their needs.

Instability is the price we have willingly paid to increasingly liberalize trade, to free capital and labor movements beyond national boundaries, to liberalize payments, and to re-establish monetary convertibility. It is the price we shall willingly continue to pay to enjoy a dynamic and vital system, without the rigidities which other economic systems, where centralization and dirigisme in economy and ideas impoverish men spiritually and materially, are trying to eliminate.

Besides, instability can easily be kept under control. We have partially eliminated instability through the creation of the two-tier gold system which has reduced the drain on official gold reserves, and through the enlargement of the swap network which temporarily diminishes the effects which movements of funds from one center to another have on official gold holdings. However, the problem remains unsolved insofar as there are changes in the central banks’ propensity to hold gold while funds move from private to official holders and capital movements from one center to another are not reversed within three or six months at the most. This is a problem which international cooperation should be able to solve in a rational manner, different from the one created by the balance of payments deficit, which is chiefly up to the national authorities to correct. We think that a solution could be worked out along the following lines:

(1) The two-tier gold system should be maintained as long as the metal remains the main component of the reserves. It has been fully proven that the communication between commercial and monetary sectors is a disequilibrating factor and that free gold markets do not play any useful role in the monetary system. Thus we succeed in avoiding a situation in which conversion of national currencies into gold by private operators reduces existing official gold holdings.

(2) The already existing network of bilateral currency arrangements should be maintained and possibly enlarged. The network should continue to be centered on the Federal Reserve Bank of New York. This has the advantage of allowing a de facto multilateralization of the operations due to the fact that the U.S. dollar is the main intervention currency (the United States lends its currency to other countries while borrowing other countries’ currencies). In this way transfers of gold from one country to another, due to capital movements among the various centers or from private to official holders, are reduced substantially.

Furthermore, regional networks of reciprocal monetary arrangements could prove useful as the beginning of reserve pooling.

(3) The reserve policies of the major industrial countries should be harmonized. Reserves should be managed in such a way as to narrow down differences in the individual gold ratios of countries party to the agreement. I have repeatedly spoken on this subject and consequently it is not worthwhile for me to dwell on it. Certainly the harmonization would have the effect of avoiding sudden changes in the central banks’ propensity to hold gold rather than fiduciary instruments. I should also mention that lately the possibility of creating conversion accounts—to be opened, for instance, on the books of the International Monetary Fund—has been carefully discussed. In these accounts, dollars and other currencies from national reserves would be deposited and, as a counterpart, the Fund would issue some special reserve assets. Such a proposal, which is more sophisticated than the policy of harmonizing reserves, deserves to be studied.

The solution which has been worked out for sterling, with the granting to the United Kingdom of a medium-term credit facility, is another example of the methods outlined above. Undoubtedly the Basle agreement is inspired by the principles expounded in my speech here two years ago, even if the method chosen at Basle differs from the one which I had outlined. Even though we would have preferred a solution in the Fund with the participation of all countries and not only the major ones, the Italian Government at any rate intends to make the maximum contribution compatible with the liquidity of its central bank’s reserves. This contribution could have been greater if the agreement had provided for the possibility of automatic liquidation of the claims accumulated in case the granting country should find itself in balance of payments difficulties. While we welcome the very large consensus which has characterized the Basle agreement, we would have preferred that France as well, even if momentarily experiencing difficulties in its balance of payments, had consented to the agreement from the very beginning. Its share could have been used once its balance of payments had returned to equilibrium. We hope that this may occur in the very near future, as soon as the beneficial effects of international cooperation become even more apparent.

Summing up: special drawing rights, reciprocal monetary arrangements, medium-term credit facilities, Fund credit operations either financed with its own resources or through the General Arrangements to Borrow, and bilateral agreements all constitute a complex and diversified mechanism with a range of automatic and conditional credits without which the system would be unable to cope with the possible shocks.

The French crisis has indeed shown that no country is safe from sudden reversals of tendencies. The destabilizing flows may in a short span of time assume sizable dimensions even if reserves are kept at a very high level. No country, therefore, can afford not to belong to such a system.

The analysis of the present problems, to which the Fund, the World Bank, and its associated institutions are called upon to find a solution, would be incomplete if I did not mention the problem of the stabilization of prices of primary products—a subject which is also on our agenda. The Italian Government, which has a direct experience with these problems due to the existence of underdeveloped areas in Italy itself, has followed with great sympathy the problems of the developing countries. We are aware that even if a great deal has already been done, even more remains to be done. The stabilization of prices of primary products has always met with the support of our country in the various forums where it has been debated. We hope that the Executive Directors may be able not only to complete their mandate in the shortest possible time but also to indicate the concrete feasible actions which the two institutions may undertake for the solution of this problem. I should also add—and in this we see a serious and evident limitation—that especially for the Fund the action to be taken should not go against the nature of the institution itself and should be confined to an appropriate and safe use of its resources.

We have also followed with great interest the review of the practices in the use of Fund resources and stand-by arrangements. While we favor the reaffirmation of the principle of equal treatment for all member countries, one should not overlook the other principle, namely, that of the conditionality of the use of Fund resources beyond the gold tranche. Such a use is and should remain conditional and temporary.

The existence of such limits makes us wonder if we should not explore new ways of solving a problem which is of prime interest to both producing and consuming countries. These institutions might consider in the future the possibility of creating, even in cooperation with other organizations having a similar interest, a specialized agency which would have the scope of coordinating, directing, and fostering the necessary steps to be taken for the stabilization of prices of primary products.

As already stated, we are convinced that both deficit and surplus countries must contribute to the solution of the adjustment problem. Therefore, we are following a policy aimed at offsetting the surplus that our balance of payments has registered in the last few years.

As is known, this surplus is traceable to the extraordinary developments of 1964-65, when the growth of domestic demand in Italy was checked in order to re-equilibrate both the balance of payments and the price structure which had been upset during the preceding phase of economic expansion. The subsequent expansionary process has proven to be slower and more laborious than expected. In particular, we have been faced with the difficulty of reconciling in the short run problems of a cyclical nature with those connected with the solution of the structural imbalances of the Italian economy.

Although in 1966 and 1967 internal demand in Italy increased faster than GNP, the current account surplus deteriorated only slightly. In 1968 the combined effect of the slowing down of the growth of internal demand, as well as the recovery under way in some of the EEC countries, will eventually lead to a larger current account surplus.

Faced with these developments, the Italian Government has submitted an expansionary budget for 1969 and complemented it with a number of measures, some of which have already been made effective while others are still awaiting approval by the Parliament. In the framework of the five-year economic plan, these are intended to spur the growth of domestic demand, particularly investment demand. Some of these measures are especially designed to raise the imports of capital goods.

In 1968, as in the two preceding years, the surplus on current account will largely be offset by private and banking capital net outflows, and official reserves will probably increase by not more than $200-250 million.

I should like to stress at this point that the offsetting of current account surpluses with capital account deficits does not correspond with the ultimate goals of Italian economic policy, which postulates essentially the achievement of equilibrium in the current as well as in the capital account. From the point of view of Italy’s economic relations vis-à-vis the rest of the world, net capital outflows are designed to restore equilibrium in Italy’s external accounts. From an internal point of view, however, net capital outflows are the price to be paid for the attainment of interest rate stability at home at a time when such stability is a prerequisite for the recovery of investment and the increase of employment.

I believe that another example of our faith in international cooperation is to be found in our reserve policy. We attempt to maintain reasonable equilibrium between gold and total reserves. …

Statement by the Alternate Governor of the Fund and Bank for Japan—Makoto Usami

I would like first to congratulate Mr. Schweitzer on his reappointment as Managing Director of the Fund. I cannot say how deeply we appreciate the Managing Director for his leadership in the excellent performance of the Fund, especially during the last 12 months which were so eventful in the field of international finance. …

I should like also to pay high tribute to the comprehensive Annual Reports made by the Fund and the World Bank Group.

I do not know of a period of 12 months as important as the recent one in the history of international finance. Events following the devaluation of the pound sterling last November put international financial cooperation to its severest test.

It also confirmed for us the importance of discipline in implementing economic strategy, as well as of the necessity for international cooperation in the field of financial problems.

In such an international environment, Japan had to deal with balance of payments difficulties. Fortunately, however, the mixture of restrictive fiscal and monetary policies worked satisfactorily, while the climate of our overseas markets also turned favorable. Recently our external account has been showing a remarkable improvement, permitting the Bank of Japan to reduce its discount rate early last August.

We recognize clearly that the essential task for us is to try to build an economy capable of sustainable growth with stability. We are mindful, of course, that we should be as cautious as ever, abiding by the principle of discipline, in order to be able to cope with any developments in the future.

I think the international monetary developments during the past year gave us most valuable lessons for the understanding of the importance of international financial cooperation. And it is my sincere hope that, based upon the valuable experience gained in this period, international financial cooperation will be further strengthened and consolidated to evolve into a closer and more effective system in the future.

The fundamental cause of the disturbances in the international monetary system in the past year lies in the simultaneous weakening of the balance of payments in the two reserve currency countries. In order to restore confidence and to maintain stability in the international monetary system, I believe it is essential that a substantial readjustment of the payments positions of the United States and the United Kingdom be achieved. However, it is becoming a matter of concern that the adjustment process, particularly in the United States, may have a dampening effect on the growth of the economy of the other developed countries as well as of the developing nations.

In order to forestall such undesirable developments and to maintain sustainable growth of the world economy, due consideration should be paid by the United States authorities to preventing their adjustment measures from going too far. At the same time, industrial countries in a comfortable balance of payments and reserve position would be expected to strengthen expansionary policies by positive utilization of their growth potential. In this regard, I look forward to further improvements in the working of the adjustment process among the countries of the world.

I now turn to the subject of international liquidity. The Proposed Amendment of the Fund Articles of Agreement approved by the Board of Governors is now awaiting acceptance by member countries.

We have consistently taken the view that growth and development of the world economy should not be stemmed by the shortage of international liquidity. To this end we have worked actively in cooperation with other major countries on the subject of deliberate reserve creation from the outset.

I am, therefore, quite satisfied with the progress made during the past year and I hope all member countries will accept the Amendment and participate in the system of the special drawing rights as quickly as possible.

Looking back on last year’s Annual Meeting at Rio de Janeiro, I recall that the question of deliberate creation of new reserve assets was still at that time an undertaking of contingency planning to meet the future reserve needs of the world.

Since then, however, there have been many developments in international finance, and during the 12 months up to the end of March 1968, total official reserves in member countries, excluding special and temporary elements, showed a small decline.

This implies that the question of reserve creation is no longer one of contingency planning but emerges as a problem calling for action to be taken by all of us at the earliest possible date.

As regards the allocation of the special drawing rights, it has been agreed that this will be based on the current Fund quotas of participants. However, the present quotas were determined on data on each country as of around 1962 and, although I do not intend to discuss the details of this problem here, I would point out that it appears that such data may not duly reflect subsequent developments and therefore the present state of some countries.

I would suggest, therefore, that adjustment of quotas of such member countries be considered, where appropriate, so that they may better reflect the actual present position of economic development of such countries.

Last year at Rio de Janeiro, Minister Mizuta expressed our view on the future of the international monetary system—that it would be neither a system subject to the physical limitations of a natural product such as gold nor a system too dependent on economic management of a single country, but would in due course inevitably evolve into a system managed by the collective wisdom and collective responsibility of all countries.

The introduction of the two-price system of gold last March indicates that the international monetary system in the future will tend to be freed from the physical limitations in the supply of gold which is so dependent on natural conditions and also so liable to be subjected to speculative demand movements. This, I think, confirms what Minister Mizuta said at the last Annual Meeting and in this sense I welcome and support it.

For some time to come, however, gold will continue to maintain its place in the world monetary system along with reserve currencies and the special drawing rights to be created in the near future. This is a fact and I recognize it.

Against this background I think it is worth pointing out that, in view of the outlook for availability of monetary gold and the prospect of early activation of the special drawing rights, the present distribution of monetary gold in the international liquidity calls for early review.

I would therefore suggest that the matter be studied and discussed in some appropriate forum to work out a realistic mechanism for a more equitable distribution of monetary gold. Promotion of transactions of monetary gold for this purpose through the Fund would surely be one of the measures to be studied at such a forum.

Turning to the problem of stabilization of prices of primary products, we have now before us Part I of a study prepared jointly by the staffs of the Fund and the Bank. I am very grateful to the staffs of both organizations for their work. It is obvious that we cannot neglect a question of such importance. I hope that the Executive Directors and the staffs of both institutions will continue their studies within the framework of the purposes of each institution and seek possible ways in which we might assist in finding feasible solutions to the problem. Therefore, I support the Resolutions.

Another subject on the agenda is the distribution and allocation of net income. I am pleased to note that the General Reserve of the Fund has now become sufficient to allow the distribution of a part of its current net income. I am, of course, prepared to support this Resolution. …

Next, I should like to touch upon matters relating to the economic development of the developing countries. Needless to say this is one of the most important problems of the world economy today. It should be clearly recognized, however, that it is a kind of problem which can be dealt with only through the concerted efforts of both developing and developed countries.

As I said before, today a slowdown in the world economy is becoming a matter of concern and, should the assistance from the developed industrial countries be somehow held down on account of their own economic difficulties, it will give a negative momentum to the already weakening trends of the world economy and might well aggravate the whole picture. On the part of the developed countries, therefore, it is their responsibility to contribute to the sustainable growth of the world economy by ensuring the flow of necessary resources to the developing countries.

There may well be balance of payments, fiscal, or other domestic difficulties confronting the industrial countries, but it is evident that more has to be done to ensure the flow of economic assistance from those countries in as much and in such way as their respective economic situations would permit.

Japan’s contribution to economic assistance to the developing nations has been increasing steadily in recent years. In 1967, in spite of various internal difficulties, the flow of funds from Japan to those countries showed again a substantial increase, reaching a level more than 20 per cent higher than that of 1966, or about 2.5 times that of 1963.

In addition to the substantial increase in volume of aid as I just mentioned, we have taken measures to improve the terms of our economic cooperation. I can assure you that it will continue to be the policy of our Government to make utmost efforts to the extent possible in contributing to secure the flow of resources needed by the developing countries.

It has been pointed out that, in order to maximize the effect of external assistance to the developing countries, it is of vital importance that positive efforts be directed within those countries toward the attainment of appropriate economic as well as social objectives, such as, among others, better utilization of their own domestic resources, improvement of education, and a more effective population policy. …

To conclude my speech, I would repeat that we in Japan look forward to better fulfillment of the respective functions of the Fund and the Bank Group and to their support for the sustained growth of the world economy.

Statement by the Governor of the Bank for Algeria—Cherif Belkacem

It has become a truism to say that underdevelopment is the major economic and social problem of the world today. However, when we consider the provisions adopted to help the underdeveloped countries, we cannot fail to perceive that the priority assigned to development has hitherto often been verbal and that it has not been given its rightful place when measures to improve international economic mechanisms have been studied and worked out.

It should be well noted that this is the case in the financial sphere, and the working out of the system of special drawing rights provides further illustration of the fact.

Algeria, too, would like to show, by a concrete proposal which I shall presently expound, that it is possible to perfect this system so that it can help in solving problems of the developing countries, without the necessity, for this purpose, of modifying either the method of creation or of cancellation, that of allocation, or that of using these new reserve instruments.

My statement will be in three parts.

I shall first describe the characteristics of the external accounts of developing countries and the relations existing between balance of payments and economic development.

I shall then demonstrate that the system of special drawing rights has not so far taken into account the situation of the underdeveloped countries.

Finally, I shall present, with statement of reasons, the proposal to which I have just alluded, which ought to enable us to attain the objectives that the President of the World Bank and its affiliates described yesterday.

The equipment of the poor nations is conditioned by problems of financing, if we want them to be able to expand considerably, diversify their production, and raise their people’s standard of living. The acquisition of this productive equipment necessarily entails making medium-term and long-term programs, which cannot be subordinated to the occasionally erratic risks and fluctuations of the balance of payments. A country’s investments cannot be properly planned if there are insufficient guarantees for their financing.

For underdeveloped countries, industrialization is first a balance of payments problem, because they do not produce the equipment that they need. In this respect their situation is far more difficult than that of industrial countries, where investment acts as a motive force to the economy, not only because of the future production for which it paves the way but equally as much on account of the immediate multiplier effects that it engenders, which increase the national product.

Thus, there is added to the first handicap experienced by developing countries, i.e., the irregularity of their exports, a second handicap derived from the fact that their investments, instead of having an impact of economic expansion from the time they are laid out, are automatically offset by wide gaps in the balance of payments. For an equal volume of investment, an underdeveloped country will need to draw far more heavily on its foreign exchange resources than an industrialized country will.

The management of the external account, therefore, has in the developing countries specific characteristics of a structural nature that influence both sides of the balance of payments and that ought to be taken into consideration in international financial mechanisms, especially within the Fund, since balance of payments problems come within its sphere of competence.

A system of compensatory financing has, it is true, been worked out by the IMF. However, while recognizing that this is a worthy contribution toward regularizing the external resources of primary producing countries, we cannot fail to recognize that it affects only one aspect—however important—of the particular features of a developing country’s external account.

The other aspect, though, is certainly not a secondary one, since it is the main reason why the external accounts of developing countries have certain special characteristics in common and why balance of payments and development are indissolubly linked.

It is in this respect that, where these countries are concerned, the Fund’s work in matters of international settlements has a direct bearing on economic development.

And so it was to be expected that, from the time when the study of a reform of the international monetary system was first broached, special—or, at least, equal—consideration should be given to the particular position of industrializing nations. But not so; this special position was not included as one of the premises for the study and at no time has it influenced the development of that study.

From projects which the rich countries wanted to make their special domain, a solution has been reached in which all countries are regarded as similar, as necessarily remaining so, and as having to face the same problems. This is a purely theoretical view, and it could be noted how much even with industrialized countries individual situations at any given moment have complicated discussions and delayed completion of the work.

The truth is that there are profound differences between the nations of the world, and these differences themselves are in continuous evolution; life is not stagnant, but forever changing, and situations are often even reversed. Monetary history over the last 20 years gives us numerous illustrations of the fact. May I remind you how far we are from the “dollar gap” that was so much talked about and that was supposed to have a structural character, at the very time when operations were under way for its elimination. Now, it is a similar structural “gap,” but an even wider one, which affects the poorer nations vis-à-vis the industrial countries.

The international payments system, therefore, must be able to adapt to particular situations and their evolution, since differences and evolution are the essence of the life of nations.

I must certainly pay tribute to the most valuable special drawing rights project and the ability shown by its authors. I also hail the fact that, for the first time to my knowledge, the Fund’s activity in this sphere is to be exercised over the long term, by virtue of an express provision of the new Articles.

On the other hand, however, the method envisaged for allocation of the special drawing rights makes no allowance for differences and changes in the circumstances of the various countries. This method of allocation could only be suitable for a theoretical world in which all countries had the same problems all the time.

So, there is nothing more arbitrary than to assign new reserve instruments in accordance with the size of quotas of IMF member countries. No doubt it will be said in justification of the proposed allocation method that the quotas reflect the economic power of the various nations and, accordingly, their attitude toward providing the world with goods and services. But this statement would, first, ignore the fact that the evolution of a country’s balance of payments does not necessarily depend on its economic power, and experience shows the most powerful countries may be unsuccessful in their attempts to overcome the deficits in their foreign account. It would also fail to recognize that the underdeveloped countries possess a large store of natural wealth which is quite as much at the world’s disposal but in respect of which marketing irregularities constitute a major economic problem of our time.

The immediate consequence of the allocation method adopted is that the industrialized countries, who least need the drawing rights, will get the lion’s share, and this means either that the effect on the international economy of the creation of these reserve instruments will be largely neutralized or that the countries already in a favorable situation will receive yet more favorable treatment.

The underdeveloped countries, for their part, will be put on short allowance, although it is they who most need this liquidity and who, by using it, would give it its economic effectiveness, as expressed in Article I of the Fund Agreement, by the expansion of international trade with a view to the development of the productive resources of all members.

Reckoning on the annual allocation that has been mentioned—special drawing rights in an amount of $2 billion—we may calculate, on the basis of a 70 per cent average statutory utilization, that these countries would increase their import capacity only by less than 1 per cent. This is certainly proof that the reform has no application for countries that need to make swift progress to make up for their economic backwardness.

This reform does not even assure satisfactory distribution of the new reserve instruments, since, from the beginning, it will load three quarters of the total amount on the industrialized countries.

However, preferential allocation of the special drawing rights to less developed countries was the surest means of distributing the new reserve instruments among all countries, through the normal interplay of international settlements, on account of the more numerous imports of the underdeveloped nations. Furthermore, these nations, with their bigger demand, would at the same time help the industrialized countries to benefit from the multiplier effects induced by those imports. In this way, the industrialized countries would soon have received a very considerable share of the special drawings rights, and, at that, by means that no one could call arbitrary, since that share would have resulted from flows of real commodities.

The desired effect on the over-all volume of international liquidity would have been obtained by equally certain means; the rich countries would equally surely have had their exchange reserves increased and their international trade favored by the new instruments. But at the same time the reform would have helped to alleviate the situation of the underdeveloped countries and would not have neglected their problems.

The reform would, therefore, have benefited rich and poor alike, and not only the rich.

There was yet another reason why less developed countries should have been the target when the special drawing rights were put into circulation, and that is that these rights will be created in accordance with the long-term needs for international liquidity and that there is little prospect of their being canceled, as stated in a Fund document. The new reserve instruments have, therefore, an economic horizon equivalent to that of the fight to end underdevelopment, and to the problems that developing countries have to face; and they were, therefore, qualified to take a part in solving these problems.

There is another aspect of the question, also, which merits attention: it is the internal effect in the receiving countries of the allocations of special drawing rights. The state will be the beneficiary and, as a counterpart, it will be able to use freely for its own needs the equivalent in local currency of the total allocations in question. Since it is unlikely that these allocations will subsequently be canceled, the method of distributing these reserve instruments entails for each annual allocation of $2 billion, and in addition to the new international liquidity thus received, a grant in local currency of about $1.3 billion in favor of the richest countries, i.e., the Group of Ten.

On both the foreign and the domestic plane, the system of special drawing rights is unfair to the less developed countries and fails to take into account the respective situations and different problems of the Fund’s members.

With no illusions as to the practical influence of a proposal made by the Minister of Finance of an underdeveloped country, I would now like to indicate how there would be a possibility, while fully retaining the mechanisms and system of distribution of the special drawing rights, of mitigating their unsatisfactory features insofar as concerns countries that need to overcome their economic backwardness.

All that would be required is for the participating countries to place the national currency counterpart of the new instruments at the disposal of IBRD and IDA. A reserve would have to be set up, with the condition that only a small percentage of national currency funds could be used for settlements in favor of third countries and, moreover, with the prior agreement of the countries supplying their currency.

The participating countries would thus keep the benefits, insofar as their international liquidity is concerned, of the allocations of special drawing rights distributed by the system I have criticized, but the national currency counterparts, instead of accruing to those countries’ national treasuries, would afford IBRD and IDA cheap resources enabling these institutions to play a more powerful and energetic role in the economic development of the world, at interest rates not so burdensome as to compromise the poor countries’ future prospects of emerging from their poverty.

Such a solution would be favorable to all.

The industrialized countries would receive their special drawing rights in accordance with the provisions of the Proposed Amendment of the Articles of Agreement, i.e., in accordance with their quotas; these reserve instruments would be at their disposal in conformity with the rules drawn up concerning them. Furthermore, the national currency counterpart of these drawing rights, which would be credited to IBRD and IDA, would encourage exports of goods and services from each industrialized country to the less developed countries. The result would be that the industrialized countries would benefit both from the additional international liquidity that the special drawing rights are designed to create and from additional economic activity engendered by the use of counterpart funds for financing the less developed countries. Furthermore, urgent appeals made to them for the replenishment of the resources of the international lending institutions could easily be satisfied, without special concern for the balance of payments.

As for the underdeveloped countries, they would benefit directly from the new reserve instruments that would be assigned to them in proportion to their quotas and, indirectly, through low-cost loans from IBRD and IDA, in the total amount of the counterpart of the allocations of special drawing rights to all participants, which would appreciably increase their capacity for development.

In general, such a formula retains all the mechanisms worked out to improve international liquidity; it simply adds to them the methods designed to ensure that the distribution of new reserve instruments does not have the second, and more direct, consequence of swelling each country’s national treasury and replaces it by utilization of the counterpart funds for development purposes, under the control of IBRD and IDA, which in the final analysis benefits the entire community of nations. Furthermore, since these counterpart funds would be earmarked for loans, their replenishment would be assured, so that there would thus be available a revolving fund for financing development. We have only to look at the balance sheet of IBRD and IDA to realize the radical change that would take place, through the proposed mechanism, in these organizations’ scope for action, if there should be distributions of special drawing rights in the equivalent of $2 billion a year for five years; in only two years IBRD’s and IDA’s current external resources would double. It may be seen that the objectives Mr. McNamara identified yesterday are within our reach.

We would thus take a tremendous—possibly a decisive—step on the road to more satisfactory expansion in the resources of the international development institutions and the determination of their interest rates at a level that can be tolerated by the less developed countries. Likewise, it would be easier to find the solution to IBRD’s and IDA’s financing local expenditures for projects, since these institutions would hold for this purpose the counterpart of the special drawing rights allocated to each underdeveloped country; this counterpart, also, would be earmarked for development and not for covering public operating expenditures.

Finally, it should be noted that, in the very unlikely event of a cancellation of special drawing rights, the constant flow of repayments on the loans granted with the aid of the national currencies entrusted to IBRD and IDA would normally enable the same to be replenished to the extent of the cancellations and of the time limits set for their realization.

In closing, I would like to stress once more that the proposal submitted by Algeria calls for no change in the mechanisms for the creation and functioning of the drawing rights, as they result from the Amendment to the Fund’s Articles of Agreement, and in the effects that these new instruments are destined to have on international liquidity, in terms of which they were conceived.

But this proposal completes and crowns the special drawing rights project by giving it a second dimension: that of the economic development of the world.


October 1, 1968.


Ministerial Meeting of the Group of 77, Statement by Dr. Raúl Prebisch, Secretary-General of the United Nations Conference on Trade and Development, at the Fourth Plenary Session; Doc. No. MM.77/I/8, Algiers, October 13, 1967, page 4.


United Nations, Department of Economic and Social Affairs, World Economic Survey, 1962, Part 1 (New York, 1963), page 111.