In presenting the Annual Report of the Executive Directors to the Board of Governors, it has become customary for the Managing Director to open his statement by welcoming the new members to the Fund. I am glad to extend today a friendly greeting to the Governors for Ghana, Ireland, Saudi Arabia and the Sudan, who are participating for the first time in an Annual Meeting of our institution. Of the 64 countries which are at present members of the Fund, 23 have joined since 1946. The increase in the membership reflects, I think, a recognition of the role which the Fund is able to play as a center for monetary cooperation on an international basis.

As the Fund is a financial institution, it is natural to look in the first place to the business side of its activities for evidence of its usefulness. In the ten and a half years which have passed since the Fund began exchange operations in the spring of 1947, the total of Fund transactions in the form of drawings and stand-by arrangements still outstanding now amounts to a little more than $3.5 billion. The total amount drawn is $2.8 billion, and no less than $1.1 billion has been repaid. That is as it should be, since the International Monetary Fund is, in effect, a “revolving fund.” The policy was adopted in 1952 that currencies acquired by members through transactions with the Fund should be repaid within three years, with an outside limit of five years. This has in fact been done. Indeed, with only a few small exceptions, all transactions prior to 1955 have been fully repaid.

This experience, therefore, emphasizes that the assistance obtained from the Fund is essentially of a short-term character and must be regarded by the countries concerned as a temporary addition to their reserves, permitting them to adopt and carry out, within a limited period of time, a constructive program to restore stability and balance in their respective economies. The time thus obtained is really “borrowed time,” of which the best use has to be made. The member countries seem quite aware of the relevance of such considerations; and they seem anxious to keep in close contact with the Fund as regards the measures they intend to introduce and the main lines of policy which they expect to follow. Indeed, it has become the practice of the Fund that, in all cases of major assistance, the main lines of financial policy of the country turning to the Fund are laid down as part of the preamble to a stand-by arrangement, or, in the case of a drawing, as a “declaration of intent” on behalf of the government of the country concerned. In that way, the broad features of the policies which can ensure a rehabilitation of the payments position are set out concisely and authoritatively.

It has been the experience of the past, and is likely to be the case again in the future, that the Fund’s business activity will vary a great deal from one period to another. There were a number of years in which central banks and other monetary authorities were able to add substantially to their reserves, benefiting not a little from the flow of funds connected with the Marshall Plan and other forms of U.S. aid. For the Fund, these were lean years from a business point of view, but they were filled with activities of other kinds. Research was started, publications were issued, and contact was established with other international institutions, whose representatives we are glad to have among us here today. The Articles of Agreement prescribed that five years after the Fund began operations those members who still retained exchange restrictions should consult annually with the Fund; as things now stand, this means that annual consultations are carried out with four fifths of all the member countries. These consultations are not confined to the particular field of exchange regulations but have developed into a review of the countries’ fiscal and credit policies against the background of their economic situations. There is now a much wider degree of freedom from exchange restrictions, especially on current account, than there has been since as far back as 1940. A majority of countries are now succeeding in making monetary and fiscal policy the principal means of dealing with their payments problems.

In addition to the annual consultations which were expressly provided for by the Articles of Agreement, the Fund has furnished technical assistance to member countries since the early years of the Fund’s existence. The demands for technical assistance have become more numerous with the years and continue to increase. To supplement its technical assistance, the Fund started a program for the training of selected people taken from the staffs of central banks, finance ministries, and statistical bureaus in member countries. Since 1951, more than 100 technicians from 50 countries have participated in the various training courses. As the membership of the Fund has increased, the training facilities have been expanded, the budget for 1957–58 providing for 25 trainees, 5 more than in the previous year. It is a matter of some importance that the cooperation between the Fund and the member countries is beginning to be facilitated by the growing number of persons who know the Fund from firsthand experience as former participants in the training programs or in some other capacity. Not a few former Executive Directors, Alternates and members of the staff have returned to their own countries and have there assumed duties which, in one way or another, bring them in contact with questions relating to the Fund.

Another matter to which much attention was given in the years of little business activity was the formulation of principles to govern the use of the Fund’s resources, i.e., the principles for the granting of Fund assistance. It has been during the active period of the last 12 months that these principles have been put to a practical test, and the experience of those months has conclusively shown how valuable they are. If it had not been for the agreed acceptance of those principles, it would hardly have been possible to deal so harmoniously and expeditiously, as was the case, with the many requests brought to the Fund during the period in question. Great use has been made of the two forms of assistance—direct drawings and stand-by arrangements—and care has been taken to secure, in each case, the degree of justification that has to be furnished in accordance with the policies relating to the different tranches of the quota.

Perhaps it is useful to state once again what these policies are: access to the gold tranche is almost automatic; and requests for drawings within the next 25 per cent (the so-called “first credit tranche”) are also treated liberally but, even so, such requests will be approved only if the country asking for assistance can show that it is making reasonable efforts to solve its own problems. For drawings beyond that tranche (i.e., beyond the first 50 per cent of the quota), substantial justification is required, and among the justifications foreseen are transactions in support of the establishment or maintenance of convertibility. At the time when these principles were set down and recorded in the Annual Report for 1955, convertibility seemed a more immediate possibility than afterward has been the case. The 1957 Annual Report,¹ which is presented to you today, explains in somewhat more detail that requests for the use of the Fund’s resources beyond the first credit tranche “are likely to be favorably received where they are intended to support well-balanced and adequate programs which are aimed at establishing or maintaining the enduring stability of the currencies concerned at realistic rates of exchange, and may therefore reasonably be regarded as establishing the conditions for substantial progress toward convertibility.” These principles naturally guide the Board of Executive Directors in their decisions, and they also serve to indicate to the various member countries under what conditions they can count on assistance from the Fund. As regards requests for assistance beyond the first 50 per cent of the quota, it seems reasonable to assume that individual countries will hesitate to turn to the Fund with such requests unless they are ready to put into effect a comprehensive program which will, in particular, maintain or restore sound monetary conditions.

The sudden spurt in business activity for the Fund, which began in the autumn of 1956, has continued up to the present. In the period from October 1, 1956 to September 16, 1957, total drawings amounted to $1,477 million, and by the end of that period the non-utilized stand-by arrangements still stood at a figure of $874 million. In the nature of the case, each request for assistance will reflect the particular conditions of the country making the request, but there are also some general circumstances and developments of which account has to be taken. The Suez affair was a circumstance of that kind; it put pressure on the reserves of several countries in Europe, the Middle East and the Far East. From an economic point of view, however, the disturbance was less than had been originally feared. It is true that the flow of goods through the Canal was interrupted for several months, but there happened to be an exceptionally mild winter in Europe which lessened the need for fuel, and it was often possible to find other outlets for exports and other sources of supply.

A development of a more fundamental nature was the growing shortage of capital, and the stiffer credit conditions, which, in the course of 1956, became characteristic of the world’s principal money and capital markets. It is, for instance, interesting to note that no single important foreign loan was floated on the Swiss capital market from the middle of 1956 to the middle of the following year. As it became more and more difficult to borrow abroad from private sources, countries in need of funds naturally turned to official institutions with requests for credit facilities. It may be difficult to tell in an individual instance to what extent such general considerations have influenced the decision to come to the Fund, but there is undoubtedly a connection between the changes which have occurred on the money and capital markets and the increased activity of the Fund.

To gain a clearer understanding of the circumstances under which countries have turned to the Fund, the instances in which assistance has been granted may be divided into four main groups. First, there are the emergency needs which suddenly arise, as they did last year in connection with the Suez crisis. The most typical example of this kind of assistance is that granted to the United Kingdom in December 1956, when $561 million was provided in the form of a drawing (all of which has been utilized) and $739 million as a stand-by (none of which has been drawn). Although the British economy was basically sound, with a surplus in the current account of the balance of payments, there suddenly arose at the time of the Suez crisis a fear that the position of the United Kingdom would be dangerously impaired, not only because of the decline in oil supplies but also for more general economic and political reasons. The wave of speculation against sterling which set in, largely in the form of shifts in the timing of payments for imports and exports—the so-called “leads and lags”—led to a serious drain on the gold and dollar reserves. It was obviously in the general interest to safeguard the value of sterling, a currency in which about one half of the world’s current transactions are settled, and therefore it was important to arrest the loss of British reserves as effectively and speedily as possible. It was for this reason that the Fund’s assistance was given so promptly and on such a substantial scale.

When the assistance was granted, the British Government had already made it clear, through statements in Parliament and through representations to the Fund, that it intended to avoid the reimposition of external controls, and, indeed, to follow fiscal, credit, and other policies designed to strengthen the economy, both internally and externally. Once the assistance was granted, the pressure on sterling subsided, and in the spring of 1957 the seasonal strength set in, permitting the British Government to extend the liberalization of its other imports. It is an interesting fact that the strain of the Suez crisis in no country led to any backsliding in regard to the liberalization of trade and payments. Pressure on sterling and on some other currencies reappeared in the summer of 1957, but it had a different origin; I will return to this subject later.

The countries in the second, rather heterogeneous group, are those which have experienced an increasing strain in the current account of their balance of payments, most often as a result of heavy expenditure on consumption and investment. Thus, over the last year, assistance has been granted to Argentina, Denmark, France, India, Japan, and, most recently, the Netherlands. The circumstances under which the strain developed varied considerably, but it was generally the case that equilibrium could be restored only if steps were taken to reduce the volume of spending, or at least prevent any further expansion for the time being.

Special difficulties often arise in those countries which have adopted rather ambitious development plans, since they may find it hard to secure the necessary finance in the present period of an increasing capital shortage. In these, as in other cases, the task of the Fund, when assistance is given, is to give temporary support to the monetary reserves while the proper adjustments are made to avoid the dangers of inflationary financing. The problems arising in this connection have been frankly discussed with the countries concerned, which have fully understood the nature of the Fund’s resources and for what purposes they are to be employed. There is a high degree of specialization in the functions of different financial institutions, and the differences arising from this specialization have to be recognized by those who turn to them for loans and credits.

Assistance in the third group is provided to meet temporary exchange difficulties caused, for instance, by seasonal balance of payments deficits. Such assistance has recently been received by Cuba, El Salvador, Honduras, and Nicaragua. These countries are largely dependent on one major export crop, and special needs may arise in the part of the year before the export crop is sold. In such cases of seasonal assistance, arrangements have usually been made for repayment to the Fund as soon as the inflow of export proceeds has again strengthened the exchange position, i.e., usually within a period of six to 12 months. Although the sums involved in these transactions have generally been rather small in absolute amounts, they have been substantial in relation to the quotas of the members concerned; and they do illustrate the capacity of the Fund to adapt its procedures to meet the widely varying requirements of its members.

Assistance in the fourth group has been granted for the definite purpose of backing stabilization programs, as in Bolivia, Chile, Colombia, Paraguay, and Peru—all in Latin America. While there are marked differences between the programs initiated and the conditions obtaining in these countries, there are also some common characteristics: one of the main reasons for adopting the stabilization programs has been that these countries wanted to get rid of the complex systems of multiple exchange practices which they had previously applied. To extricate themselves from these systems, they have adopted as a temporary measure a fluctuating exchange rate at which all or the bulk of their foreign transactions are settled. It is sometimes feared that the adoption of a fluctuating exchange rate may be a way for a country to avoid taking the proper internal measures which are needed to restore internal and external balance to its economy. It should, therefore, be explained that, in the five countries here mentioned, far-reaching measures of fiscal and monetary reform have constituted an important and integral part of the programs adopted. It is, moreover, understood that these countries will stabilize their currencies at a fixed rate as soon as practicable. It has been an interesting feature of the financial arrangements with these countries that the assistance granted by the Fund has been combined with credits from such other sources as the U.S. Treasury or commercial banks in the United States and the Export-Import Bank.

It may be premature to judge the ultimate success of some of these stabilization programs. Difficulties of an economic or political character have sometimes arisen, and continued consultations have taken place, as provided for in the Fund’s stand-by arrangements. But one thing is certain: in these, as in other countries, the general public is increasingly demanding a stable and reliable currency, being tired of the continuous inflationary rise in prices which often goes together with a depreciation of the national currency in the foreign exchange markets.

To return for a moment to the foreign exchange systems in force in various countries: the 1957 Annual Report¹ points out that multiple currency practices of varying degrees of complexity and importance are used by 38 of the member countries. But a gradual simplification is taking place, and it is only in about one fourth of the 38 countries that the multiple rate systems may be described as “complex.” In the past year, the Fund has devoted special attention to the problem of multiple rate practices, just as in earlier years it has studied and developed policies with respect to the elimination of bilateralism and retention quotas. The experience of the Fund over a number of years has been that multiple currency practices are undesirable, not only because of the damage they cause to the economies of the countries maintaining them, but also because of the harm they often cause to the trade of other countries. Although the Fund has welcomed the progress made toward unification of exchange rates, it has become increasingly concerned with the particular damage done by the complex multiple rate systems, where they still persist. In a decision which is recorded in this year’s Annual Report,² the Executive Board has expressed its desire to see more rapid progress in the simplification of these complex systems, and has stated its willingness to cooperate in finding ways and means of doing so. It is prepared to render technical assistance and, whenever any proposed exchange simplification and related economic programs or measures are considered adequate, the Fund will give sympathetic consideration to a request for financial assistance.

Another aspect of this decision is that the Fund will be reluctant to approve changes in multiple rate systems which make them more complex; and it will not continue to approve systems of that kind unless the countries maintaining them are making reasonable progress toward their simplification and ultimate elimination, or are taking adequate measures or adopting programs which seem likely to result in such progress. The overriding consideration in all these cases is that unification of exchange rates is a basic objective of the Fund, for the Fund has not given up the hope that it will be able to witness in the not far distant future the restoration of a multilateral system of international payments with fully convertible currencies. The more numerous the countries that make their currencies freely convertible, the less easy will the other countries find it to continue to maintain complicated systems of exchange control which not only curtail the freedom of the ordinary citizen, but also enhance the danger of recurring currency depreciations, as the experiences of the past two or three decades abundantly prove.

It must be remembered that the activity of the Fund is to a large extent conditioned by the requests of one kind or another by member countries—and over the timing of such requests the Board of Executive Directors and the management of the Fund have only limited influence. In the taking of decisions resulting from these requests, questions of principle often arise of importance not only for the particular case under review, but also as precedents likely to influence future decisions. It is largely by precedents that fair treatment is insured and useful traditions established, both in the national and in the international field.

The experience gained has a certain bearing on the proposal made by the Governor for Canada at the last Annual Meeting for a certain reorganization of the Fund’s work. I am sure that everyone would agree with his suggestion that a closer contact should be established between the Fund and officials with operating responsibilities in the various countries. But practical experience tends to prove it is impossible to meet the suggestion that a few meetings a year be scheduled for the discussion of important policy matters. The Managing Director must be able to confer regularly with Executive Directors who can be helpful in influencing policy decisions in the countries they represent. It is not necessary, however, that all countries follow the same system in appointing or electing their Executive Directors. I think it is generally agreed that it must be left, as hitherto, to the individual countries or groups of countries to follow whatever system they find desirable and practical. But there are, however, various ways in which contact between operating officials in the various countries and the Fund can be strengthened. It is, for instance, highly desirable that, in conformity with a growing practice, countries making requests for financial assistance from the Fund should send senior operating officials to Washington to discuss their problems. Furthermore, it would be possible to hold at the headquarters of the Fund every year, or every second year, a meeting of a limited number of highly placed persons in the various member countries, and among them senior operating officials, to discuss informally some of the problems facing the Fund and its members. Having put forward these suggestions, which I think go some way toward meeting the Canadian proposal, I want to emphasize that I think the Fund is best served by the presence in Washington of highly qualified persons on the Board of Executive Directors, able to remain in close touch with and, when the occasion arises, able to influence decisions in the country or countries appointing or electing them, whenever that is necessary in connection with the work of the Fund.

In this review of problems of specific Fund activities, the subject of Fund liquidity should be included. On September 16, 1957, the amount held by the Fund in gold and U.S. and Canadian dollars was the equivalent of US$2,428 million. Against that has clearly to be set the amount of stand-bys outstanding, equal to US$874 million, since that is a contingent liability. Thus there remains a free amount of US$1,554 million, which is still considerable, although less than half the free amount a year ago (US$3,669 million). Even though it seems likely that some other currencies may soon be drawn from the Fund, it is still wise to concentrate attention on its holdings of gold and U.S. and Canadian dollars.

Since the amount of the original quotas of most members was fixed at Bretton Woods in 1944, prices have risen by, say, 40 per cent; and, in addition, the volume of world trade has increased by 70 per cent. This is a question which is, of course, kept under constant review. It would, indeed, be a pity if the Fund’s work were to be hampered by an inadequacy of liquid resources, for it is an institution which combines certain peculiar advantages. Because it is a revolving fund, the resources allotted to it will do service again and again over the years; and, since its assistance is given to strengthen monetary reserves rather than for particular projects, it has become the specific task of the Fund to concern itself with the whole field of fiscal, credit and exchange policies of the various countries, in a general effort to restore a proper working of the world’s monetary system. These may be big words, but the basic objectives must not be forgotten, even though for a time the Fund may have been largely concerned with the task of limiting the damage caused by emergencies—a task in itself of no mean importance in a disturbed world. Although it is still too early to observe the full effect of the policy measures taken in many of the countries that have received Fund assistance, it should be reported that, almost without exception, most serious efforts are being made in the various countries to strengthen their economies. If world trade continues to expand without any dangerous decline in the over-all level of prices, one can be reasonably hopeful that, by and large, the present endeavors will prove successful.

In regard to the general aspects of the world economy, there are two or three haunting questions uppermost in our minds. The first is related to inflation: Will it be possible to arrest inflation and the consequent rise in costs and prices in a world so anxious for expansion in both the public and the private sector? The second question is that of the relative value of currencies with which the markets of the world have been so greatly concerned in recent weeks and months. And the third has to do with the possibilities of financing for underdeveloped countries.

While the main characteristic of inflation—an excessive increase in demand—is the same everywhere, the causes may differ from country to country. In some countries, there is still direct government borrowing from the central bank, or the extension of central bank credit on a considerable scale at the request of the government for such purposes as low-cost housing or the financing of public utilities. In such cases, we meet our old enemy, direct inflation for government account. The answer to the problem of how to arrest such inflation is simple. Direct or indirect financing by the central bank must cease, however difficult it may be politically to discard nefarious practices which have become a habit.

But there are now some countries—and they are often economically the most important—in which there has been a tendency for prices to rise even though the government budget is balanced and the increase in the money volume has been held down to very moderate proportions, about 1 per cent per annum. In these cases, it is often being said that the old methods will no longer work and, in particular, that an increase in the discount rate will not be of much value.

Some explanation is needed of why these doubts have now arisen. It seems certain that credit restraint, fortified by rising interest rates, proved a very effective means of arresting inflation in the Korean crisis of 1950–51, when merchants and industrialists, fearing a shortage in the supply of important raw materials, added to their inventories with the result that prices rose sharply. The reason that credit restraint works in an inventory boom is very simple. Those who have to finance the increased holding of stocks will usually turn to the commercial banks with demands for considerable amounts of short-term accommodation and, in such a situation, if the central banks apply a policy of credit restraint, they usually force the holders of stocks to sell out, and in that way the boom is decisively broken. That is, of course, what happened in 1951–52, and the success then achieved greatly helped to restore repute to monetary policy after many years of defamation.

The present boom provides us with an example of a different type of inflation. This is essentially a long-term investment boom, resembling very much the increase in economic activity which in the past has been associated with the upward phase of the business cycle. In some countries, the present boom began in 1954, and in others somewhat later. It is shown in the August issue of the Federal Reserve Bulletin that in 1954–56 the output of capital goods in the United States and in Western Europe increased more than that of other goods. In those three years, the gross national product increased at the same rate in Western Europe and in the United States, namely, by 10 per cent, but the fixed capital formation increased by as much as 20 per cent in Western Europe and by 15 per cent in the United States.

Fortunately, genuine savings have also been rising in a great number of countries (otherwise it would not have been possible to sustain such a high level of investment). But even with these higher savings it has not always been easy to secure the funds needed, and there has been great temptation to turn to the banks, for both short-term and long-term financing. In such a situation, equilibrium will not be maintained simply by raising short-term interest rates; the long-term rates must also rise, and, as you know, that is what has been happening in recent years. For the central banks it has then been important to take sufficient measures to insure that there should be no undue expansion of central bank credit. In their own sphere, these measures have generally been very effective. As I have already mentioned, the money supply has increased by only about 1 per cent per annum in a number of countries, including both the United Kingdom and the United States. But in such a situation, pools of previously stagnant money may be set in motion; and, as more or less dormant deposits become activated, the velocity of circulation will be increased, and in that way also the effective money supply. There is, however, a limit beyond which the velocity of circulation cannot increase in countries where confidence in the currency has been maintained. Also, in some countries, recent increases in the cost of living may be regarded in part as a belated adjustment to earlier inflation in that the cost of living indices have shown a smaller increase than wholesale prices, when compared with prewar conditions. It is also of considerable interest that, for some time, commodity prices have been falling on the world markets and that the quotations on stock exchanges have been characterized by pronounced weakness. The question has been raised of how it is possible for the tendencies revealed in the falling prices of wool, copper, lead and zinc, and the weakness on the stock exchanges, to be reconciled with the idea of a persistent inflationary boom. Clearly, the present situation is not all of one pattern; it is a spotty one; there are, indeed, some signs that inflation may no longer be dominating the whole economic trend. We seem to be in a position which, according to past experiences, is likely to occur when an investment boom has gone on for a certain number of years. Then the increased supplies resulting from past investment begin to reach the markets, acting as a strong counterweight to the remaining inflationary pressure. But there are, at the same time, large amounts of investments already launched, and not yet completed, which will need further financing—often on a considerable scale.

The demand for funds, including the demand for bank credit, will therefore persist, and there is also the danger that the expectations of industrialists, merchants and workers, nourished by many years of a prosperous boom, will remain too optimistic. In these circumstances, the timing of the measures to be taken in the different countries may not always be the same. In one country, it may be necessary to continue a restrictive credit policy until the expectations of continued inflation have been eliminated. In other countries, the time may already be ripe for some relaxation of restrictive measures. Not a little will depend upon the attitude of labor, for, in such an uncertain situation, it is particularly necessary to guard against further sharp increases in costs, lest any subsequent adjustments be unduly painful.

For my own part, I cannot help thinking that the complaints which one hears on all sides against the application of restrictive credit policies are in themselves evidence of the fact that these policies are really effective, even in conditions of today. They have, of course, to extend to the long-term field, and they must bring about a real limitation in the availability of credit, which will not be to everybody’s liking. But if sufficient determination is shown, and complementary measures are taken in the fiscal field, there is every reason to believe that the credit policies now adopted in a widening circle of countries will prove successful. May I add just one word to stress that, when the tide turns, there must be sufficient flexibility in the minds of those who determine monetary policy for money rates to be eased and the other restrictive measures to be relaxed at an early date in order to avoid any unnecessary strain.

In connection also with the second question relating to the great nervousness recently felt in the foreign exchange markets, especially in Europe, I should like to refer to some past experiences. When we cast our minds back to the years of the gold standard, before 1914, we are often inclined to forget that there were then, from time to time, moments of crisis when an individual currency was exposed to great pressure, as sterling was during the Baring crisis in the 1890’s. But that crisis, and others of the same nature, were overcome by the application of vigorous monetary measures, particularly sharp increases in interest rates, and by the manifest readiness to meet the demands made on the exposed currency. Once such a crisis was successfully overcome, confidence in the currency could be expected to increase, since it had shown that it could stand the test of the pressures made upon it. In the same way today, if we can ride out the storm that has recently been raging, we shall have laid the ghost of monetary troubles so frequently connected with the month of September, and we shall thus have helped to base the currency structure of the world on more secure foundations.

Before 1914, it could generally be taken for granted that on a trading basis the individual currencies were fairly well in line with each other. But after such an upheaval as World War II, it necessarily takes some time before stable relations are re-established. Twelve years, however, have passed since the war was over, and I believe that recent movements have been largely in the direction of a more balanced position. So far as comparisons of wage costs are concerned, if account is taken not only of the money wages received by the workers, but also of the additional social contributions paid in by the employers, it seems that the remaining differences are fairly well in line with what can be regarded as a tolerable state of affairs between the various economies. Also in the field of money supply, much progress has been made toward a better balance. Let me quote only two figures: since 1949, the money supply has risen in Great Britain by 10 to 12 per cent, and in West Germany by 130 per cent. The British had no doubt too high a money supply in 1949, but the way in which they have since held it down, largely by the difficult task of almost totally limiting any increases in bank advances, has revealed their determination to maintain the value of their currency. On the basis of present indications, including the realization of a surplus in the current account of the balance of payments, sterling is certainly not overvalued at its present parity. When exchange rates are on a realistic basis, there is great wisdom in strongly defending the existing rate structure. Such defense may require very stiff measures for a time, but that is better than to take the easy way out and fall into habits of currency devaluation which it may be exceedingly difficult to break.

In determining the actual credit policy to be pursued in a country, account must generally be taken not only of the need to react to the different phases of the business cycle, but also of changes in the balance of payments relations to other countries. In a boom, for instance, there will generally be a stiffening of credit policies in all countries, but some countries will be adding to their exchange reserves while other countries will be losing foreign exchange. Those that lose exchange will, as a rule, have to stiffen their interest rates and apply other forms of credit restraint more vigorously than those that are able to add to their reserves. It will generally be a delicate matter to decide how much consideration should be given to each of these factors. But under the reign of the gold standard, it was because account was taken of both factors—fluctuations in the business cycle and relative changes in reserves—that balance in the world’s monetary structure was maintained for such a long period.

Last week we had a spectacular illustration in Europe of the attention fortunately still given to the changes resulting from a flow of funds in the determination of credit policy. As you know, Germany has been adding to its monetary reserves while sterling has been under pressure. Last Wednesday, the central bank of West Germany reduced its discount rate from 4½ per cent to 4 per cent, and the Bank of England on the following day increased the bank rate from 5 per cent to 7 per cent. As far as sterling is concerned, it is well to remember that the present speculation mostly takes the form of merchants either delaying or speeding up their payments, and in both cases they will usually need to rely heavily on bank credit. When the cost of such credit is suddenly increased by as much as 2 per cent, which is what will happen in many cases as a result of the rise in the bank rate in London, there is every reason for those who utilize the credits to reconsider whether the cost of shifting the date of payments has not become too great now that the British Government has so clearly shown its determination not to alter the exchange rate. This determination has been shown not only by indicating its agreement to the increase in the bank rate, but also by a series of measures including cuts in the volume of public investment.

West Germany, on the other hand, has become an increasingly strong creditor with large additions to its reserves, not only as a result of a balance of payments surplus on current account, but also because of movements of funds owing to the widespread expectations of a revaluation of the deutsche mark. The authorities in West Germany have made it clear that they have no intention of altering the value of the mark; they have, moreover, in recent months taken measures of different kinds designed to reduce their balance of payments surplus, including the lowering of the bank rate last week, a step which has not only reinforced their announced determination not to revalue the mark, but will also serve as a stimulus to internal activities. The persistent growth in Germany’s creditor position has come rather as a surprise to Germany itself; and, in some respects, as in the question of capital exports, neither the German authorities nor private interests in Germany have as yet been able to provide for the further measures which are likely to be needed. They are surely most anxious that, as far as it depends upon them, their strong creditor position should not expose the monetary structure in Europe to any undue strain. The growing knowledge that there will be no alteration in the value of either the deutsche mark or the pound sterling should in itself have a calming effect on the movement of funds.

My experience recently has been that, in many parts of the world, there are what I regard as misconceptions about the economic strength of Europe. I have met with what I consider an unduly pessimistic view. The figures which I have quoted here show that the rate of fixed capital formation is higher in Western Europe than in the United States. During recent years, an improvement has been evident in the economic life of France, Italy, West Germany, the Benelux countries, Austria, and Greece, as well as Great Britain and Scandinavia. There is every reason to expect that the improvement will continue. Agricultural production has benefited greatly from modern techniques, and the output of foodstuffs in several of these countries is now some 50 per cent higher than it was before the last war. Furthermore, the increasing supplies of new commodities and substitutes, such as aluminum, synthetic rubber, and artificial textile fibres, have tended to reduce the prices of a number of materials that Europe has to import, and thus to improve Europe’s terms of trade. It seems also to be a fact that several modern inventions (and not only in the fields of electronic and atomic energy) can more effectively be exploited in already industrialized countries. In spite of the folly of two terrible wars, Europe has been able to stage a remarkable “comeback” with a development that is as yet far from finished.

I wish I could add that the factors which have helped Europe to recover its position have also benefited other parts of the world, but I am afraid that in some respects this has not been the case. The lower prices that many products will fetch, when a number of new commodities and substitutes are provided, will naturally not be welcomed by the primary producers; and the fact that the use of modern inventions will lead to extensive investment in the already industrialized countries will probably mean that there will be less incentive for European and American savings to move to under-developed countries, except when oil deposits and other rich natural resources provide a special incentive.

Mr. Cuaderno, in his address yesterday, referred to some of the difficulties of these countries. When it comes to indicating the policies they should follow, I cannot make myself believe that there can be any great merit in adopting commodity schemes involving an artificial price fixing, nor that these countries will be able to mobilize any additional real resources by a credit expansion which leads to inflation. Whatever advantages some countries may have gained for a time from a policy of credit expansion, they have generally found—when people have awakened to the fact that their money was constantly losing in value—that there has been a reduction in genuine savings, soon followed by a decline in the rate of growth of the national product. Having said this, I feel a little embarrassed. It is often only too easy to indicate what should not be done. You will remember Dickens’ description of the Circumlocution Office, an office which, among all the public departments, was always beforehand in the art of perceiving how not to do it.

With regard to positive measures, I feel that we have to attach our hopes to expanded world markets and a more coordinated relationship between the policies of the countries wanting fresh capital and those in a position to provide it. The former countries must so arrange their policies that they will continue to be regarded as creditworthy, especially since grants and loans from official sources can never be large enough to provide all the foreign capital required and, therefore, private funds must also be attracted. And the countries which can provide the capital will equally have to see to it, as some already do, that in their official arrangements and private market practices care is taken to reserve certain amounts for foreign financing in underdeveloped countries. It may be that a useful solution could be found in an association of several lending institutions and, sometimes, also private industrial firms, working together with the borrowing country to establish conditions in which inflation is arrested, fair treatment is given to foreign capital, and fresh funds, both official and private, are attracted to the country concerned. Many able persons are now devoting themselves to an examination of these problems. While it would be unfair to say that a great deal has not already been done, there is hope that with goodwill on all sides more significant results will be achieved in the future.

It is a disturbed year that we have behind us, not only in monetary affairs but also in the political field. It is reminiscent of 1848 when sudden outbursts of unrest, seemingly unconnected with one another, appeared in different parts of the world. In periods of this sort, such stabilizing influences as can be provided are needed more than ever. It is our hope that some of the assistance granted by the Fund has acted as a stabilizing factor in the past year. We also hope that the present Meeting here in Washington will help to dispel the doubts and uncertainties which still trouble us in the field of foreign exchange, and that it thus will exert a decisively stabilizing influence.